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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-Q

(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the quarterly period ended October 26, 2008

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------

For the transition period from  to

Commission
file number 000-22009

NEOMAGIC CORPORATION

(Exact Name of Registrant as Specified in Its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 77-0344424                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|780 Montague Expressway, Suite 504 San Jose, California        |  | 95131                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(408) 428-9725

Registrants Telephone Number, Including Area Code

Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.    Yes   ̈    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the
definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   ̈            Accelerated Filer   ̈            Non-Accelerated Filer   ̈            Smaller Reporting Company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

The number of shares of the Registrants
Common Stock, $.001 par value, outstanding at October 26, 2008 was 12,570,914.









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Table of Contents

NEOMAGIC CORPORATION

FORM 10-Q

INDEX



|                              |  |                                                                                                                             |  |     
|----------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                             |  | PAGE
|PART I. FINANCIAL INFORMATION |  |                                                                                                                            
|                              |  |                                                                                                                            
|Item 1.                       |  | Financial Statements:                                                                                                       |  |     
|                              |  |                                                                                                                            
|                              |  | Unaudited Condensed Consolidated Statements of Operations Three and Nine months ended October 26, 2008 and October 28, 2007 |  | 3   
|                              |  |                                                                                                                            
|                              |  | Condensed Consolidated Balance Sheets October 26, 2008 (unaudited) and January 27, 2008                                     |  | 4   
|                              |  |                                                                                                                            
|                              |  | Unaudited Condensed Consolidated Statements of Cash Flows Nine months ended October 26, 2008 and October 28, 2007           |  | 5   
|                              |  |                                                                                                                            
|                              |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                              |  | 6   
|                              |  |                                                                                                                            
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 16  
|                              |  |                                                                                                                            
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                  |  | 20  
|                              |  |                                                                                                                            
|Item 4.                       |  | Controls and Procedures                                                                                                     |  | 20  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                            
|                              |  |                                                                                                                            
|Item 1A.                      |  | Risk Factors                                                                                                                |  | 21  
|                              |  |                                                                                                                            
|Item 6.                       |  | Exhibits                                                                                                                    |  | 26  
|                              | 
|Signatures                    |  | 28                                                                                                                         
|                              | 
|Certifications                |  |                                                                                                                            



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Part I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                 |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                 |  | October 26,2008    |        |   | October 28,2007   |   |        | October 26,2008 |  |   | October 28,2007 |  
|Net revenue                                                      |  | $                  | 500    |   |                   | $ | 620    |                 |  | $ | 1,476           |   |  | $ | 1,253   |  
|Cost of revenue                                                  |  |                    | 1,468  |   |                   |   | 383    |                 |  |   | 4,533           |   |  |   | 963     |  
|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Gross profit (loss)                                              |  |                    | (968   | ) |                   |   | 237    |                 |  |   | (3,057          | ) |  |   | 290     |  
|Operating expenses:                                              |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Research and development                                         |  |                    | 1,359  |   |                   |   | 2,945  |                 |  |   | 7,615           |   |  |   | 8,890   |  
|Sales, general and administrative                                |  |                    | 1,203  |   |                   |   | 2,037  |                 |  |   | 4,474           |   |  |   | 5,285   |  
|Restructuring expense                                            |  |                    | 1,516  |   |                   |   |       |                 |  |   | 1,645           |   |  |   |        |  
|Gain on sale of patents                                          |  |                    |       |   |                   |   |       |                 |  |   | (9,500          | ) |  |   |        |  
|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Total operating expenses                                         |  |                    | 4,078  |   |                   |   | 4,982  |                 |  |   | 4,234           |   |  |   | 14,175  |  
|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss from operations                                             |  |                    | (5,046 | ) |                   |   | (4,745 | )               |  |   | (7,291          | ) |  |   | (13,885 | )
|Other income (expense), net:                                     |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Interest income and other                                        |  |                    | 69     |   |                   |   | 57     |                 |  |   | 170             |   |  |   | 462     |  
|Interest expense                                                 |  |                    | (7     | ) |                   |   | (13    | )               |  |   | (26             | ) |  |   | (54     | )
|Loss on marketable equity securities                             |  |                    | (37    | ) |                   |   |       |                 |  |   | (191            | ) |  |   |        |  
|Gain from change in fair value of warrant liability              |  |                    | 4      |   |                   |   | 15     |                 |  |   | 38              |   |  |   | 758     |  
|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Loss before income taxes                                         |  |                    | (5,017 | ) |                   |   | (4,686 | )               |  |   | (7,300          | ) |  |   | (12,719 | )
|Income tax expense (benefit)                                     |  |                    | 4      |   |                   |   | 7      |                 |  |   | 27              |   |  |   | (444    | )
|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss                                                         |  | $                  | (5,021 | ) |                   | $ | (4,693 | )               |  | $ | (7,327          | ) |  | $ | (12,275 | )
|                                                                 |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Basic and diluted net loss per share                             |  | $                  | (0.40  | ) |                   | $ | (0.38  | )               |  | $ | (0.59           | ) |  | $ | (1.00   | )
|Weighted average common shares outstanding for basic and diluted |  |                    | 12,571 |   |                   |   | 12,379 |                 |  |   | 12,517          |   |  |   | 12,335  |  

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial
Statements.



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NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                     |  |                            |          |   |                 |   |          |  
|---------------------------------------------------- |  | -------------------------- | -------- | - | --------------- | - | -------- | -
|                                                     |  | October 26,2008(unaudited) |          |   | January 27,2008 |  
|ASSETS                                               |  |                            |          |   |                 |   |          |  
|Current assets:                                      |  |                            |          |   |                 |   |          |  
|Cash and cash equivalents                            |  | $                          | 119      |   |                 | $ | 964      |  
|Short-term investments                               |  |                            |         |   |                 |   | 500      |  
|Accounts receivable, net                             |  |                            | 142      |   |                 |   | 529      |  
|Inventory                                            |  |                            | 242      |   |                 |   | 3,715    |  
|Other current assets                                 |  |                            | 322      |   |                 |   | 426      |  
|                                                     |  |                            |          |   |                 |   |          |  
|Total current assets                                 |  |                            | 825      |   |                 |   | 6,134    |  
|Property, plant and equipment, net                   |  |                            |         |   |                 |   | 692      |  
|Long-term prepaid assets                             |  |                            |         |   |                 |   | 74       |  
|Long-term investments                                |  |                            |         |   |                 |   | 471      |  
|Other assets                                         |  |                            |         |   |                 |   | 242      |  
|                                                     |  |                            |          |   |                 |   |          |  
|Total assets                                         |  | $                          | 825      |   |                 | $ | 7,613    |  
|                                                     |  |                            |          |   |                 |   |          |  
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY       |  |                            |          |   |                 |   |          |  
|Current liabilities:                                 |  |                            |          |   |                 |   |          |  
|Accounts payable                                     |  | $                          | 1,496    |   |                 | $ | 1,448    |  
|Compensation and related benefits                    |  |                            | 1,198    |   |                 |   | 1,057    |  
|Income taxes payable                                 |  |                            | 296      |   |                 |   | 583      |  
|Current portion of capital lease obligations         |  |                            | 420      |   |                 |   | 316      |  
|Warrant liability                                    |  |                            |         |   |                 |   | 38       |  
|Other accruals                                       |  |                            | 258      |   |                 |   | 196      |  
|                                                     |  |                            |          |   |                 |   |          |  
|Total current liabilities                            |  |                            | 3,668    |   |                 |   | 3,638    |  
|Capital lease obligations                            |  |                            |         |   |                 |   | 339      |  
|Other long-term liabilities                          |  |                            |         |   |                 |   | 89       |  
|Commitments and contingencies (Note 11)              |  |                            |          |   |                 |   |          |  
|Stockholders equity:                                |  |                            |          |   |                 |   |          |  
|Common stock                                         |  |                            | 40       |   |                 |   | 39       |  
|Additional paid-in-capital                           |  |                            | 123,278  |   |                 |   | 122,071  |  
|Accumulated other comprehensive income               |  |                            |         |   |                 |   | 271      |  
|Accumulated deficit                                  |  |                            | (126,161 | ) |                 |   | (118,834 | )
|                                                     |  |                            |          |   |                 |   |          |  
|Total stockholders (deficit) equity                 |  |                            | (2,843   | ) |                 |   | 3,547    |  
|                                                     |  |                            |          |   |                 |   |          |  
|Total liabilities and stockholders (deficit) equity |  | $                          | 825      |   |                 | $ | 7,613    |  
|                                                     |  |                            |          |   |                 |   |          |  

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial
Statements.



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NEOMAGIC CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                              |  |                   |         |   |                 |   |         |  
|----------------------------------------------------------------------------- |  | ----------------- | ------- | - | --------------- | - | ------- | -
|                                                                              |  | Nine Months Ended |        
|                                                                              |  | October 26,2008   |         |   | October 28,2007 |  
|Operating activities:                                                         |  |                   |         |   |                 |   |         |  
|Net loss                                                                      |  | $                 | (7,327  | ) |                 | $ | (12,275 | )
|Adjustments to reconcile net loss to net cash for operating activities:       |  |                   |         |   |                 |   |         |  
|Depreciation                                                                  |  |                   | 830     |   |                 |   | 921     |  
|Stock-based compensation                                                      |  |                   | 1,138   |   |                 |   | 1,358   |  
|Provision for allowance for bad debts                                         |  |                   | 12      |   |                 |   |         |  
|Net write-downs of inventory                                                  |  |                   | 3,417   |   |                 |   |        |  
|Gain on sale of patents                                                       |  |                   | (9,500  | ) |                 |   |        |  
|Gain on sale of property, plant and equipment                                 |  |                   | (25     | ) |                 |   |        |  
|Loss on marketable equity securities                                          |  |                   | 191     |   |                 |   |        |  
|Change in fair value on revaluation of warrant liability                      |  |                   | (38     | ) |                 |   | (758    | )
|Reversal of provision for tax liability                                       |  |                   |        |   |                 |   | (480    | )
|Changes in operating assets and liabilities:                                  |  |                   |         |   |                 |   |         |  
|Accounts receivable                                                           |  |                   | 375     |   |                 |   | (182    | )
|Inventory                                                                     |  |                   | 56      |   |                 |   | (3,013  | )
|Other current assets                                                          |  |                   | 354     |   |                 |   | (108    | )
|Long-term prepaid and other assets                                            |  |                   | 75      |   |                 |   | 48      |  
|Accounts payable                                                              |  |                   | 48      |   |                 |   | 245     |  
|Compensation and related benefits                                             |  |                   | 141     |   |                 |   | 303     |  
|Income taxes payable                                                          |  |                   | (287    | ) |                 |   | 13      |  
|Other accruals                                                                |  |                   | (27     | ) |                 |   | 368     |  
|                                                                              |  |                   |         |   |                 |   |         |  
|Net cash used in operating activities                                         |  |                   | (10,567 | ) |                 |   | (13,560 | )
|Investing activities:                                                         |  |                   |         |   |                 |   |         |  
|Proceeds from sale of patents                                                 |  |                   | 9,500   |   |                 |   |        |  
|Proceeds from sale of property, plant and equipment                           |  |                   | 25      |   |                 |   |        |  
|Purchases of property, plant and equipment                                    |  |                   | (138    | ) |                 |   | (139    | )
|Purchases of short-term investments                                           |  |                   | (2,991  | ) |                 |   | (4,459  | )
|Maturities of short-term investments                                          |  |                   | 3,491   |   |                 |   | 3,990   |  
|                                                                              |  |                   |         |   |                 |   |         |  
|Net cash provided by (used in) investing activities                           |  |                   | 9,887   |   |                 |   | (608    | )
|Financing activities:                                                         |  |                   |         |   |                 |   |         |  
|Payments on capital lease obligations                                         |  |                   | (235    | ) |                 |   | (790    | )
|Net proceeds from issuance of common stock                                    |  |                   | 70      |   |                 |   | 290     |  
|                                                                              |  |                   |         |   |                 |   |         |  
|Net cash used in financing activities                                         |  |                   | (165    | ) |                 |   | (500    | )
|                                                                              |  |                   |         |   |                 |   |         |  
|Net increase (decrease) in cash and cash equivalents                          |  |                   | (845    | ) |                 |   | (14,668 | )
|Cash and cash equivalents at beginning of period                              |  |                   | 964     |   |                 |   | 16,468  |  
|                                                                              |  |                   |         |   |                 |   |         |  
|Cash and cash equivalents at end of period                                    |  | $                 | 119     |   |                 | $ | 1,800   |  
|                                                                              |  |                   |         |   |                 |   |         |  
|Supplemental schedules of cash flow information:                              |  |                   |         |   |                 |   |         |  
|Cash paid during the period for:                                              |  |                   |         |   |                 |   |         |  
|Interest                                                                      |  | $                 | 28      |   |                 | $ | 54      |  
|Taxes                                                                         |  | $                 | 314     |   |                 | $ | 22      |  
|Supplemental disclosure of non-cash investing activities:                     |  |                   |         |   |                 |   |         |  
|Change in fair value of marketable equity securities                          |  | $                 | (271    | ) |                 | $ |        |  
|Reclassification of warrant liability to equity for amended warrants (Note 9) |  | $                 |        |   |                 | $ | 2,986   |  

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial
Statements.



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NEOMAGIC CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited
interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of NeoMagic Corporation and its wholly owned subsidiaries (collectively
NeoMagic or the Company). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial
position at October 26, 2008, and the operating results and cash flows for the three and nine months ended October 26, 2008 and October 28, 2007. These financial statements and notes should be read in conjunction with the
Companys audited financial statements and notes thereto for the year ended January 27, 2008, included in the Companys Form 10-K filed with the Securities and Exchange Commission.

On September 24, 2008, the Company announced a cessation of its efforts to raise additional capital. As a result, NeoMagic proceeded with efforts to
substantially reduce its operating activities and reduce its on-going expenditures by terminating employment for substantially all of its operational and engineering employees in all worldwide locations. Beginning September 19, 2008,
management, acting based upon a plan approved by the Board of Directors, eliminated 52 positions in the Company. On September 23, 2008, the remaining independent directors of the Company, Brett Moyer, Carl Stork and David Tomasello, notified
the Company that they were resigning as directors of NeoMagic Corporation, effective September 23, 2008. The Company has initiated efforts for the orderly reduction of its operations, including the fulfillment of its outstanding sales and other
contracts, headcount reductions, securing continuing support for its existing customers, seeking purchasers for its intellectual property and tangible assets and providing for outstanding and anticipated liabilities. The Company anticipates that its
operations will consist primarily of supporting sales orders from its existing customers, collecting the resulting receivables from such sales orders, collecting proceeds from assets sold, satisfying obligations, and administration of the
corporation.

At October 26, 2008, the Company had $119 thousand in cash and cash equivalents and $142 thousand in accounts
receivable. The Company believes that this level of cash, cash equivalents and accounts receivable is not sufficient to maintain continuing operations at current levels. The Company has been unable to raise additional capital to fund operating
activities and has ceased efforts to do so. The adequacy of the Companys resources will depend largely on its ability to achieve positive operating cash flows principally through reductions in expenditures. These uncertainties raise
substantial doubt about the Companys ability to continue as a going concern. If the Company is unable to reduce operating expenditures to levels sufficiently below its recurring revenues, it expects to take all appropriate actions to maximize
the value of the Company. The Company is in the process of taking actions to achieve further reductions in its operating expenses. The Company also believes that it can take actions to generate cash by selling or licensing intellectual property.

The results of operations for the three and nine months ended October 26, 2008 are not necessarily indicative of the results that may
be expected for the year ending January 25, 2009.

The third fiscal quarters of 2009 and 2008 ended on October 26, 2008 and
October 28, 2007, respectively. The Companys quarters generally have 13 weeks. The third quarter of fiscal 2009 and fiscal 2008 each had 13 weeks. The Companys fiscal years generally have 52 weeks. Fiscal 2009 will have 52 weeks and
fiscal 2008 had 52 weeks.



|2. | Stock-Based Compensation
|-- | ------------------------

During the quarter ended
October 26, 2008, the Company had several stock-based employee compensation plans, including stock option plans and an employee stock purchase plan. Stock options may be issued to directors, officers, employees and consultants (Service
Providers) under the Companys 2003 Stock Option Plan, Amended 1998 Stock Option Plan, and 1993 Stock Option Plan. Stock options for employees or new non-employee members of the Board of Directors generally vest over a four-year period,
have a term of ten years from the issuance date, and an exercise price equal to the closing price on the Nasdaq Capital Market of the common stock on the date of grant. Stock options issued to current non-employee members of the Board of Directors
generally vest over a two-year period, have a term of ten years from the issuance date, and an exercise price equal to the closing price on the Nasdaq Capital Market of the common stock on the date of grant. Generally, unvested options are forfeited
thirty to ninety days from the date a Service Provider ceases to be an employee or director (as the case may be), or in the case of death or disability for a period of up to twelve months. To cover the exercise of vested options, the Company issues
new shares from its authorized but unissued share pool. At October 26, 2008, 1,887,288 shares of the Companys common stock were reserved for issuance under the 2003 Stock Option Plan. There are 565,772 shares of the Companys common
stock reserved for issuance pursuant to outstanding options under the Amended 1998 Stock Option Plan, which expired in June 2008. No new grants may be made under this plan. There are 56,801 shares of the Companys common stock reserved for
issuance pursuant to outstanding options under the 1993 Stock Option Plan, which expired in 2003. No new grants may be made under this plan.

The 2006 Employee Stock Purchase Plan (ESPP) permits eligible employees to purchase common stock through payroll deductions of up to 10% of the employees compensation. The price of common stock to be purchased under ESPP
is 85% of the lower of the fair market value of the common stock at the beginning of the offering period or at the end of the relevant purchase period. To cover the exercise of vested options the Company issues new shares from its authorized but
unissued share pool. A total of 151,699 shares of the Companys common stock were reserved at October 26, 2008, for future issuance under the 2006 Employee Stock Purchase Plan. Effective July 2008, the Board of Directors temporarily
suspended the Companys ESPP program.

Adoption of SFAS No. 123(R)

Effective January 30, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which requires the Company to measure the cost of employee services received in exchange for all equity awards granted under its stock option plans and employee stock purchase plans based on the fair market value of the
award as of the grant date. SFAS 123R supersedes Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation and Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25). The Company has adopted SFAS 123R using the modified prospective application method of adoption that requires the Company to record compensation cost related to unvested stock awards as of January 30, 2006 by recognizing
the unamortized grant date fair value of these awards over the remaining service periods of those awards with no change in historical reported earnings. Awards granted after January 30, 2006 are valued at fair value in accordance with
provisions of SFAS 123R and recognized on a ratable basis over the service periods of each award. The Company began using estimated forfeiture rates in the first quarter of 2007 based on its historical experience.

Prior to fiscal year 2007, the Company accounted for stock-based compensation in accordance with APB 25 using the intrinsic value method, which did not
require that compensation cost be recognized for the Companys stock awards provided the exercise price was established at greater than or equal to 100% of the



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common stock fair market value on the date of grant. Prior to fiscal year 2007, the Company provided pro forma disclosure amounts in accordance with SFAS
No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure (SFAS No. 148), as if the fair value method defined by SFAS No. 123 had been applied to its stock-based compensation.

Stock Compensation Expense

The following table shows
total stock-based compensation expense included in the accompanying Condensed Consolidated Financial Statements for the three and nine months ended October 26, 2008 and October 28, 2007.



|                                    |  |                    |     |                   |   |                 |  |                 |       |  |   |      
|----------------------------------- |  | ------------------ | --- | ----------------- | - | --------------- |  | --------------- | ----- |  | - | -----
|                                    |  | Three Months Ended |     | Nine Months Ended
|                                    |  | October 26,2008    |     | October 28,2007   |   | October 26,2008 |  | October 28,2007
|Cost of revenue                     |  | $                  | 4   |                   | $ | 7               |  | $               | 23    |  | $ | 17   
|Research and development            |  |                    | 37  |                   |   | 223             |  |                 | 587   |  |   | 709  
|Selling, general and administrative |  |                    | 125 |                   |   | 207             |  |                 | 528   |  |   | 632  
|                                    |  |                    |     |                   |   |                 |  |                 |       |  |   |      
|Total                               |  | $                  | 166 |                   | $ | 437             |  | $               | 1,138 |  | $ | 1,358
|                                    |  |                    |     |                   |   |                 |  |                 |       |  |   |      

For the nine months ended October 26, 2008 and October 28, 2007, the total compensation
cost related to unvested stock-based awards granted to employees under the stock option plans but not yet recognized was approximately $3.7 million and $2.3 million, respectively, after estimated forfeitures. The cost will be recognized on a
straight-line basis over an estimated weighted average period of approximately 2.57 years and 2.84 years for the nine months ended October 26, 2008 and October 28, 2007, respectively, for stock options and will be adjusted if necessary in
subsequent periods if actual forfeitures differ from those estimates.

In July 2008, the Board of Directors temporarily suspended the ESPP
program and subsequently no unrecognized compensation expense related to the ESPP remains. For the nine months ended October 28, 2007, the total compensation cost related to options to purchase common shares under the ESPP but not yet
recognized was approximately $598 thousand. This cost would have been recognized on a straight-line basis over a weighted-average period of approximately 1.75 years.

Net cash proceeds from the sales of common stock under employee stock option and stock purchase plans were $70 thousand and $290 thousand for the nine months ended October 26, 2008 and October 28, 2007,
respectively. No income tax benefit was realized from the sales of common stock under employee stock purchase and stock option plans during the nine months ended October 26, 2008 and October 28, 2007. In accordance with SFAS 123(R), the
Company presents excess tax benefits from the exercise of stock options, if any, as financing cash flows rather than operating cash flows.

Determining
Fair Value

Valuation and amortization method  The Company estimates the fair value using a Black-Scholes option pricing formula
and a single option award approach. This fair value is then amortized ratably over the requisite service periods of the awards, which is generally the vesting period.

Expected term  The Companys expected term represents the period that the Companys stock-based awards are expected to be outstanding. The expected term for the third quarter of fiscal 2009 is based
upon historical review. The Company believes that this method meets the requirements for SFAS 123(R).

Expected Volatility  The
Companys expected volatility for the quarter ended October 26, 2008 is computed based on the Companys historical stock price volatility. The Company believes historical volatility to be the best estimate of future volatility and
noted no unusual events that might indicate that historical volatility would not be representative of future volatility.

Risk-Free
Interest Rate  The risk-free interest rate used in the Black-Scholes option valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the option.

Expected Dividend  The dividend yield reflects that the Company has never paid any cash dividends and has no intention to pay
dividends in the foreseeable future.

Estimated Forfeiture  The estimated forfeiture rate for the three and nine months ended
October 26, 2008 and October 28, 2007 was based upon an analysis of our historical forfeiture rates. The estimated average forfeiture rate for the three and nine months ended October 26, 2008 was 76.08% and 55.28%, respectively. The
estimated average forfeiture rate for the three and nine months ended October 28, 2007 was 27.79% and 20.76%, respectively.

In the
three and nine months ended October 26, 2008 and October 28, 2007, respectively, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option valuation model and the ratable attribution approach
using a dividend yield of 0% and the following weighted average assumptions:



|                                 |  |                    |   |  |                     |   |  |                    |   |  |                   |   |  |                 |   |  |                 |   |  |                 |   |  |                 |  
|-------------------------------- |  | ------------------ | - |  | ------------------- | - |  | ------------------ | - |  | ----------------- | - |  | --------------- | - |  | --------------- | - |  | --------------- | - |  | --------------- | -
|                                 |  | Option Plans       |   |  | Stock Purchase Plan |  
|                                 |  | Three Months Ended |   |  | Nine Months Ended   |   |  | Three Months Ended |   |  | Nine Months Ended |  
|                                 |  | October 26,2008    |   |  | October 28,2007     |   |  | October 26,2008    |   |  | October 28,2007   |   |  | October 26,2008 |   |  | October 28,2007 |   |  | October 26,2008 |   |  | October 28,2007 |  
|Risk-free interest rates         |  | 0.69               | % |  | 4.10                | % |  | 1.75               | % |  | 4.40              | % |  | n/a             | * |  | 4.90            | % |  | n/a             | * |  | 5.00            | %
|Volatility                       |  | 1.88               |   |  | 0.97                |   |  | 0.96               |   |  | 0.98              |   |  | n/a             | * |  | 0.84            |   |  | n/a             | * |  | 0.93            |  
|Expected life of option in years |  | 4.00               |   |  | 4.00                |   |  | 3.76               |   |  | 4.10              |   |  | n/a             | * |  | 1.60            |   |  | n/a             | * |  | 1.70            |  



|* | Our Board of Directors temporarily suspended the ESPP program in July 2008. Subsequently, no additional grants have been made to the ESPP program.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Stock Options and Awards Activities

The following is a summary of the Companys stock option activity under the stock option plans as of October 26, 2008 and related information:



|                                                |  |            |   |  |                                           |      |                                                   |   |                                       |  |   |  
|----------------------------------------------- |  | ---------- | - |  | ----------------------------------------- | ---- | ------------------------------------------------- | - | ------------------------------------- |  | - | -
|                                                |  | Shares     |   |  | Weighted AverageExercise Price(per share) |      | WeightedAverageRemainingContractualTerm(in
Years) |   | AggregateIntrinsicValue(in thousands)
|Outstanding at January 27, 2008                 |  | 2,198,125  |   |  | $                                         | 6.34 |                                                   |   |                                       |  |   |  
|Granted                                         |  | 734,250    |   |  | $                                         | 1.47 |                                                   |   |                                       |  |   |  
|Exercised                                       |  |           |   |  | $                                         |     |                                                   |   |                                       |  |   |  
|Forfeitures and cancellations                   |  | (1,320,063 | ) |  | $                                         | 4.44 |                                                   |   |                                       |  |   |  
|                                                |  |            |   |  |                                           |      |                                                   |   |                                       |  |   |  
|Outstanding at October 26, 2008                 |  | 1,612,312  |   |  | $                                         | 5.68 |                                                   | $ | 3.49                                  |  | $ | 
|                                                |  |            |   |  |                                           |      |                                                   |   |                                       |  |   |  
|Vested and Expected to Vest at October 26, 2008 |  | 1,202,569  |   |  | $                                         | 6.44 |                                                   | $ | 2.41                                  |  | $ | 
|                                                |  |            |   |  |                                           |      |                                                   |   |                                       |  |   |  
|Exercisable at October 26, 2008                 |  | 1,182,056  |   |  | $                                         | 6.51 |                                                   | $ | 2.32                                  |  | $ | 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value,
based on the Companys closing stock price of $0.01 per share at October 24, 2008, the last market day of our fiscal quarter ended October 26, 2008, which would have been received by option holders had all option holders exercised
their options that were in-the-money as of that date. There were no in-the-money options exercisable as of October 26, 2008. During the three and nine months ended October 26, 2008, there were no options exercised. The aggregate intrinsic
value of options exercised during the three and nine months ended October 28, 2007 was $37 thousand and $116 thousand, respectively.

The exercise prices for options outstanding and exercisable as of October 26, 2008 and their weighted average remaining contractual lives were as follows:



|                         |  |                   |  |                                         |  |                              |       |                   |       |                              |   |      
|------------------------ |  | ----------------- |  | --------------------------------------- |  | ---------------------------- | ----- | ----------------- | ----- | ---------------------------- | - | -----
|                         |  | Outstanding       |  | Exercisable                            
|Range of Exercise Prices |  | SharesOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | NumberExercisable |       | WeightedAverageExercisePrice
|(per share)              |  | (in thousands)    |  | (in years)                              |  | (per share)                  |       | (in thousands)    |       | (per share)                 
|$1.35  2.00             |  | 280               |  | 6.47                                    |  | $                            | 1.51  |                   | 102   |                              | $ | 1.50 
|$2.01  4.02             |  | 414               |  | 4.38                                    |  | $                            | 2.64  |                   | 328   |                              | $ | 5.51 
|$4.03  6.00             |  | 333               |  | 2.61                                    |  | $                            | 4.70  |                   | 252   |                              | $ | 4.76 
|$6.01  9.92             |  | 314               |  | 2.10                                    |  | $                            | 6.57  |                   | 228   |                              | $ | 6.58 
|$9.93  20.00            |  | 248               |  | 1.51                                    |  | $                            | 14.08 |                   | 249   |                              | $ | 14.08
|$20.01 and over          |  | 23                |  | 4.52                                    |  | $                            | 22.43 |                   | 23    |                              | $ | 22.43
|                         |  |                   |  |                                         |  |                              |       |                   |       |                              |   |      
|                         |  | 1,612             |  | 3.49                                    |  | $                            | 5.68  |                   | 1,182 |                              | $ | 6.51 
|                         |  |                   |  |                                         |  |                              |       |                   |       |                              |   |      



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##### Table of Contents

|3. | Loss Per Share
|-- | --------------

The following data shows the
amounts used in computing loss per share and the effect on the weighted-average number of shares of diluted potential common stock.



|                                                                    |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                    |  | Three Months Ended |        |   | Nine Months Ended |  
|(in thousands, except per share data)                               |  | October 26,2008    |        |   | October 28,2007   |   |        | October 26,2008 |  |   | October 28,2007 |  
|Numerator:                                                          |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net loss                                                            |  | $                  | (5,021 | ) |                   | $ | (4,693 | )               |  | $ | (7,327          | ) |  | $ | (12,275 | )
|                                                                    |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Denominator:                                                        |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Denominator for basic net loss per share, weighted average shares   |  |                    | 12,571 |   |                   |   | 12,379 |                 |  |   | 12,517          |   |  |   | 12,335  |  
|Effect of dilutive securities:                                      |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Stock options outstanding                                           |  |                    |       |   |                   |   |       |                 |  |   |                |   |  |   |        |  
|                                                                    |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Denominator for diluted net loss per share, weighted average shares |  |                    | 12,571 |   |                   |   | 12,379 |                 |  |   | 12,517          |   |  |   | 12,335  |  
|Basic net loss per share                                            |  | $                  | (0.40  | ) |                   | $ | (0.38  | )               |  | $ | (0.59           | ) |  | $ | (1.00   | )
|Diluted net loss per share                                          |  | $                  | (0.40  | ) |                   | $ | (0.38  | )               |  | $ | (0.59           | ) |  | $ | (1.00   | )

For the three and nine months ended October 26, 2008 and October 28, 2007, respectively,
basic net loss per share equals diluted net loss per share since all options and warrants outstanding have an exercise price greater than the fair market value of our common stock as of those dates. During the three months ended October 26,
2008 and October 28, 2007, the Company excluded from the computation of basic and diluted loss per share options and warrants to purchase 4,740,102 and 4,083,240 shares of common stock, respectively, because the effect would be anti-dilutive.
During the nine months ended October 26, 2008 and October 28, 2007, the Company excluded from the computation of basic and diluted loss per share options and warrants to purchase 5,098,946 and 4,165,061 shares of common stock,
respectively, because the effect would be anti-dilutive.



|4. | Cash, Cash Equivalents and Short-term Investments
|-- | -------------------------------------------------

All highly liquid investments purchased with an original maturity of 90 days or less are considered cash equivalents. Investments with an original maturity of greater than 90 days, but less than one year, are classified as short-term
investments.

Investments in debt securities are classified as held-to-maturity when the Company has the positive intent and ability to
hold the securities to maturity. Held-to-maturity securities are stated at amortized cost with corresponding premiums or discounts amortized to interest income over the life of the investment. Securities not classified as held-to-maturity are
classified as available-for-sale and are reported at fair market value. Unrealized gains or losses on available-for-sale securities are included, net of tax, in stockholders equity until their disposition. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale securities are included in interest income and other. The cost of securities sold is based on the specific identification method.



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##### Table of Contents

All cash equivalents and short-term investments are classified as available-for-sale and are recorded at
fair market value. All available-for-sale securities have maturity dates of less than one year from the balance sheet dates. For all classifications of securities, cost approximates fair market value as of October 26, 2008 and January 27,
2008, and consists of the following (in thousands):



|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|-------------------------- |  | ---------------------------- | --- | ------------------- | - | ------------------ |  | ------------ | --- | ------------------- | - | ------------------ |  | - | --- |  | - | ---
|                           |  | October 26, 2008 (unaudited) |     | January 28, 2008   
|(in thousands)             |  | AdjustedCost                 |     | GrossUnrealizedLoss |   | EstimatedFairValue |  | AdjustedCost |     | GrossUnrealizedGain |   | EstimatedFairValue
|Cash and cash equivalents: |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Money market funds         |  | $                            | 8   |                     | $ |                   |  | $            | 8   |                     | $ | 533                |  | $ |    |  | $ | 533
|Bank accounts              |  |                              | 111 |                     |   |                   |  |              | 111 |                     |   | 431                |  |   |    |  |   | 431
|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Total                      |  | $                            | 119 |                     | $ |                   |  | $            | 119 |                     | $ | 964                |  | $ |    |  | $ | 964
|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Short-term investments:    |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|U.S. Government agencies   |  |                              |    |                     |   |                   |  |              |    |                     | $ | 500                |  | $ |    |  | $ | 500
|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Total                      |  | $                            |    |                     | $ |                   |  | $            |    |                     | $ | 500                |  | $ |    |  | $ | 500
|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Long-term investments:     |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Equity securities*         |  | $                            | 9   |                     | $ |                   |  | $            | 9   |                     | $ | 200                |  | $ | 271 |  | $ | 471
|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    
|Total                      |  | $                            | 9   |                     | $ |                   |  | $            | 9   |                     | $ | 200                |  | $ | 271 |  | $ | 471
|                           |  |                              |     |                     |   |                    |  |              |     |                     |   |                    |  |   |     |  |   |    



|* | Equity Securities were included in other current assets at October 26, 2008.
|- | ----------------------------------------------------------------------------

Investment in Marketable Securities

In January 2006, the Company made a $200 thousand minority equity investment in
Neonode, Inc. (Neonode), a then privately held mobile telephone company. In August 2007, effective upon the merger of Neonode with a subsidiary of SBE, Inc. (SBE), SBE changed its name to Neonode, Inc. and its common stock is
now publicly traded on the Nasdaq Stock Exchange (NEON). Upon the merger of SBE and Neonode, the Companys investment converted into approximately 127,000 shares of Neonode common stock. The investment is classified as an available
for sale security and had a fair value on October 26, 2008 and January 27, 2008 of $9 thousand and $471 thousand, respectively. Management considers the impairment to be other than temporary and has recorded an impairment loss of $191
thousand in Other income (expense), net in the Statement of Operations. As of January 27, 2008, the fair value reflected a gross unrealized gain of $271 thousand.

Fair Value of Financial Instruments

On January 28, 2008, the Company adopted Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157) which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair
value measurements. SFAS 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS 157 is effective for the Company beginning January 28, 2008, except for non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving
identical or comparable assets or liabilities.

FAS 157 includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect
assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions. The fair
value hierarchy consists of the following three levels:



|Level | 1 - Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|----- | ------------------------------------------------------------------------------------------------



|Level | 2 - Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or
      liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs       which are derived principally from or corroborated
by observable market data.
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Level | 3 - Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable (i.e.,       supported
by little or no market activity).
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table summarizes the Companys financial assets measured at fair value
on a recurring basis as of October 26, 2008 and the basis for that measurement (in thousands):



|                   |  |                               |    |                                                 |   |   
|------------------ |  | ----------------------------- | -- | ----------------------------------------------- | - | --
|                   |  |                               |    | (Level 1)                                      
|                   |  | Balance as ofOctober 26, 2008 |    | Quoted Pricesin ActiveMarkets ofIdenticalAssets
|Money market funds |  | $                             | 8  |                                                 | $ | 8 
|Equity securities* |  |                               | 9  |                                                 |   | 9 
|                   |  |                               |    |                                                 |   |   
|                   |  | $                             | 17 |                                                 | $ | 17
|                   |  |                               |    |                                                 |   |   



|* | Equity securities were included in Other Current Assets at October 26, 2008.
|- | ----------------------------------------------------------------------------



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##### Table of Contents

The Companys financial assets and liabilities are valued using market prices on both active markets
(Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. As of October 26, 2008, the Company did not have any assets
with valuations obtained from readily-available pricing sources for comparable instruments (Level 2 assets) or those without observable market values that would require a high level of judgment to determine fair value (Level 3 assets).

FASBs Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB
Statement No. 115 (SFAS 159) also became effective the first quarter of fiscal 2009. This option was not chosen, so marketable securities continue to be accounted for as available-for-sale securities under SFAS 115
Accounting for Certain Investments in Debt and Equity Securities.



|5. | Inventories
|-- | -----------

Inventories are stated at the lower of
cost or market value. Cost is determined by the first-in, first-out method. The Company writes down the inventory value for estimated excess and obsolete inventory, based on managements assessment of future demand and market conditions. If
actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required. The following table sets forth Inventories (in thousands):



|               |  |                            |     |                 |   |      
|-------------- |  | -------------------------- | --- | --------------- | - | -----
|               |  | October 26,2008(unaudited) |     | January 27,2008
|Raw materials  |  | $                          | 55  |                 | $ | 2,078
|Finished goods |  |                            | 187 |                 |   | 1,637
|               |  |                            |     |                 |   |      
|Total          |  | $                          | 242 |                 | $ | 3,715
|               |  |                            |     |                 |   |      



|6. | Accumulated Other Comprehensive Loss
|-- | ------------------------------------

Unrealized
gains or losses on the Companys available-for-sale securities are included in comprehensive loss and reported separately in stockholders equity.

Net comprehensive loss includes the Companys net loss, as well as accumulated other comprehensive loss on available-for-sale securities. Net comprehensive loss for the three and nine months ended
October 26, 2008 and October 28, 2007, respectively, is as follows (in thousands):



|                                                                      |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | --------------- |  | - | --------------- | - |  | - | ------- | -
|                                                                      |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                      |  | October 26,2008    |        |   | October 28,2007   |   |        | October 26,2008 |  |   | October 28,2007 |  
|Net loss                                                              |  | $                  | (5,021 | ) |                   | $ | (4,693 | )               |  | $ | (7,327          | ) |  | $ | (12,275 | )
|Net change in unrealized gain / loss on available for sale securities |  |                    |       |   |                   |   | 310    |                 |  |   | (271            | ) |  |   | 312     |  
|                                                                      |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  
|Net comprehensive loss                                                |  | $                  | (5,021 | ) |                   | $ | (4,383 | )               |  | $ | (7,598          | ) |  | $ | (11,963 | )
|                                                                      |  |                    |        |   |                   |   |        |                 |  |   |                 |   |  |   |         |  

Total accumulated other comprehensive income was $0 thousand and $271 thousand at October 26,
2008 and January 27, 2008, respectively. Accumulated other comprehensive income consisted entirely of unrealized gains on available for sale securities.



|7. | Restructuring Expense
|-- | ---------------------

In September 2008, the
Company extended a corporate restructuring plan (the Plan) initiated in July 2008 and approved by the Board of Directors in response to continuing economic uncertainties with the intent to improve its operating cost structure. As part of
the Plan, the Company discontinued its semiconductor product development efforts and reduced its workforce through a lay-off of approximately 52 of its employees, terminating substantially all of its operational and engineering employees in all
worldwide locations. These restructuring activities have resulted in charges related to severance and benefit arrangements for terminated employees, contract termination and other exit-related costs, and asset impairment charges related to
accelerated amortization of semiconductor design automation software tools and other property and equipment assets. Related to these activities, the Company incurred total restructuring charges of $1.5 million and $1.6 million, in the three and nine
months ended October 26, 2008. Of these charges, $0.7 million and $0.9 million, in the three and nine months ended October 26, 2008, resulted in cash expenditures. The restructuring charges are reported in the condensed consolidated
statements of operations under operating expenses, Restructuring expense. Restructuring charges were as follows:



|                                            |  |                    |       |                   |   |                 |  |                 |       |  |   |  
|------------------------------------------- |  | ------------------ | ----- | ----------------- | - | --------------- |  | --------------- | ----- |  | - | -
|                                            |  | Three Months Ended |       | Nine Months Ended
|                                            |  | October 26,2008    |       | October 28,2007   |   | October 26,2008 |  | October 28,2007
|Employee severance and benefit arrangements |  | $                  | 737   |                   | $ |                |  | $               | 866   |  | $ | 
|Contract termination and other costs        |  |                    | 12    |                   |   |                |  |                 | 12    |  |   | 
|Asset impairment                            |  |                    | 767   |                   |   |                |  |                 | 767   |  |   | 
|                                            |  |                    |       |                   |   |                 |  |                 |       |  |   |  
|Total restructuring charges                 |  | $                  | 1,516 |                   | $ |                |  | $               | 1,645 |  | $ | 
|                                            |  |                    |       |                   |   |                 |  |                 |       |  |   |  



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##### Table of Contents

The following table provides a summary of the activities for the three and nine months ended
October 26, 2008 related to the Companys restructuring activities:



|                                        |  |                               |     |   |                                   |   |     |                 |  |   |      |  
|--------------------------------------- |  | ----------------------------- | --- | - | --------------------------------- | - | --- | --------------- |  | - | ---- | -
|                                        |  | EmployeeSeveranceand Benefits |     |   | ContractTerminationandOther Costs |   |     | AssetImpairment | 
|Restructuring balance, July 27, 2008    |  | $                             | 68  |   |                                   | $ |    |                 |  | $ |     |  
|Charged to costs and expenses           |  |                               | 737 |   |                                   |   | 12  |                 |  |   | 767  |  
|Non-cash items                          |  |                               |    |   |                                   |   | (12 | )               |  |   | (767 | )
|Cash payments                           |  |                               | (68 | ) |                                   |   |    |                 |  |   |      |  
|                                        |  |                               |     |   |                                   |   |     |                 |  |   |      |  
|Restructuring balance, October 26, 2008 |  | $                             | 737 |   |                                   | $ |    |                 |  | $ |     |  



|8. | Obligations Under Capital Leases
|-- | --------------------------------

In January 2007,
the Company entered into a new capital lease to replace an expiring lease for software licenses used in the design of its semiconductor products. Obligations under capital leases represent the present value of future payments under the lease
agreements. Property, plant and equipment include the following amounts for leases that have been capitalized (in thousands):



|                                 |  |                            |      |   |                 |   |      |  
|-------------------------------- |  | -------------------------- | ---- | - | --------------- | - | ---- | -
|                                 |  | October 26,2008(unaudited) |      |   | January 27,2008 |  
|Software under capital lease     |  | $                          | 655  |   |                 | $ | 655  |  
|Accumulated amortization         |  |                            | (655 | ) |                 |   | (236 | )
|                                 |  |                            |      |   |                 |   |      |  
|Net software under capital lease |  | $                          |     |   |                 | $ | 419  |  
|                                 |  |                            |      |   |                 |   |      |  

The amortization of amounts capitalized under leases has been accelerated to fully amortize the
capitalized software costs as of October 26, 2008 due to the restructuring activities in the third quarter of fiscal 2009 and the discontinuation of semiconductor development efforts utilizing the capitalized software.

Future minimum payments under the capital leases consist of the following, as of October 26, 2008 (in thousands):



|                                            |  |   |      |  
|------------------------------------------- |  | - | ---- | -
|Fiscal 2009 (remaining three months)        |  | $ | 88   |  
|Fiscal 2010                                 |  |   | 354  |  
|                                            |  |   |      |  
|Total minimum lease payments                |  |   | 442  |  
|Less: amount representing interest          |  |   | (22  | )
|                                            |  |   |      |  
|Present value of net minimum lease payments |  |   | 420  |  
|Less: current portion                       |  |   | (420 | )
|                                            |  |   |      |  
|Long-term portion                           |  | $ |     |  
|                                            |  |   |      |  

In January 2009, the Company settled in full its outstanding obligation under capital leases for a
cash payment of $25,000.



|9. | Warrant Liability
|-- | -----------------

On December 6, 2006,
NeoMagic closed the sale and issuance of (i) 2,500,000 shares of its Common Stock, $.001 par value (the 2006 Shares), and (ii) warrants to purchase 1,250,000 shares of Common Stock at an exercise price of $5.20 per share (the
2006 Warrants). The Company sold and issued the 2006 Shares and the 2006 Warrants for an aggregate offering price before deducting any expenses of $11,450,000. After deducting offering costs, net cash proceeds received by the Company
were approximately $10.5 million. The issuance and sale of the 2006 Shares and the 2006 Warrants was registered under a shelf Registration Statement on Form S-3, which was declared effective on October 31, 2006 (the Primary S-3).



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##### Table of Contents

The 2006 Warrants provide that each holder of a 2006 Warrant may exercise its 2006 Warrant for shares of
Common Stock at an exercise price of $5.20 per share, but no 2006 Warrant was exercisable for cash until one year after its initial issuance. The 2006 Warrants, however, became net exercisable on June 6, 2007. The 2006 Warrants provide for
adjustments to the exercise price per share and number of shares for which the 2006 Warrants may be exercised in certain circumstances, including stock splits, stock dividends, certain distributions, reclassifications and, subject to a minimum price
of $4.58 per share, dilutive issuances (i.e., price based anti-dilution adjustments).

The 2006 Warrants were initially classified as a
liability in accordance with EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock (EITF 00-19). Although the 2006 Warrants as originally issued
provided that shares of common stock may be issued upon a cash exercise under a private placement exemption if the Primary S-3 is not effective, the staff of the SEC advised the Company that the Company would be obligated to physically settle the
contract only by delivering registered shares. Under EITF 00-19, if the Company must settle the contract by delivering registered shares, it is assumed that the Company will be required to net-cash settle the contract. As a result, the 2006 Warrants
were initially required to be classified as a liability. The fair value of the 2006 Warrants was estimated to be $5.7 million at the date of issue using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate
of 4.53%; no dividend yield; an expected life of 5 years; and a volatility factor of 94.9%. The Company is required to revalue the cash exercisable 2006 Warrants at the end of each reporting period with the change in value reported in the statement
of operations as a gain or loss from the change in fair value on revaluation of warrant liability in the period in which the change occurred. In fiscal 2008 and fiscal 2007, the Company recognized a gain on the change in fair value on
revaluation of warrant liability of $0.8 million and $1.8 million, respectively. Since the warrants were initially classified as a liability, the proceeds allocated to equity were the gross proceeds of $11,450,000 less the fair value of the warrants
of $5,688,000 and less the offering costs allocated to the warrants of $273,000. The total offering costs of $974,000 were allocated between the 2006 Warrants and the common stock based on their respective fair values. Offering costs of $273,000
were allocated to the 2006 Warrants and reported as interest expense in the statement of operations for fiscal 2007.

In July 2007, the
Company offered holders of 2006 Warrants, the ability to amend their outstanding warrants. The amended 2006 Warrants are only exercisable on a net share settlement basis and are no longer cash exercisable. Since holders of amended 2006 warrants
cannot make or execute a cash exercise, the Company will not be required to register the shares issued upon exercise of such amended warrants under any circumstances. Accordingly, as of July 27, 2007, the amended 2006 Warrants were no longer
required to be classified as a liability under EITF 00-19 and were reclassified as equity. The Company completed its warrant exchange offer on July 27, 2007. At that time, 96% of all outstanding 2006 Warrants were amended, representing
1,200,000 shares of the 1,250,000 shares subject to warrants that had been available for amendment. One investor holding a warrant to purchase 50,000 shares chose not to participate. The 2006 Warrants were revalued on July 27, 2007, the date
the warrant exchange offer was completed, and the Company recognized a loss on the change in fair value on revaluation of warrant liability of $248,000. The fair value of the 2006 Warrants was estimated to be $3.1 million. The $3.0 million value of
the amended 2006 Warrants was reclassified to equity as of July 27, 2007 and the $0.1 million value of the 2006 Warrants that were not amended remains on the Companys balance sheet as a liability of less than $1,000 as of October 26,
2008 and $38,000 as of January 27, 2008.



|10. | Income Taxes
|--- | ------------

The Company maintained a full
valuation allowance on its net deferred tax assets as of October 26, 2008. The valuation allowance was determined in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, or
SFAS No. 109, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis.
The Company intends to maintain a full valuation allowance on the U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (FAS 109). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 effective January 29, 2007. In accordance
with FIN 48, paragraph 19, the Company decided to classify interest and penalties as a component of tax expense. As a result of the implementation of FIN 48, the Company recognized a $101 thousand decrease in liability for unrecognized tax benefits,
which was accounted for as an adjustment to the January 29, 2007 balance of retained earnings.

The Company has unrecognized tax
benefits of approximately $2.3 million as of January 27, 2008, of which $571 thousand if recognized would result in a reduction of the Companys effective tax rate. The Company recorded a decrease of its unrecognized tax benefits of
approximately $296 thousand during the nine months ended October 26, 2008.

Over the next twelve months, the Companys existing
tax positions may continue to generate an increase in unrecognized tax benefits subject to managements periodic reviews of the Companys uncertain tax positions. However, the Company does not expect the changes in unrecognized tax
benefits of its tax positions, if any, will result in recognition of an uncertain tax liability.

The Company is subject to audit by the
IRS for all years since fiscal 2003, and to audit by the California Franchise Tax Board for all years since fiscal 2001.



|11. | Commitments and Contingencies
|--- | -----------------------------

Commitments

In May 1996, the Company moved its principal headquarters to a new facility in Santa Clara, California, under a non-cancelable operating lease that
expired in April 2003. In January 1998, the Company entered into a second non-cancelable operating lease for an adjacent building, which became its new corporate headquarters. This lease had a co-terminus provision with the original lease that
expired in April 2003. In March 2002, the Company extended the term for 45,000 square feet under this lease for another seven years with a termination date of April 2010. The Company leases offices in Israel and India under operating leases that
expire in September 2008 and December 2008, respectively. Future minimum lease payments under operating leases are as follows (in thousands):



|                                       |  |   |      
|-------------------------------------- |  | - | -----
|Fiscal 2009 (remaining three months) * |  | $ | 496  
|Fiscal 2010                            |  |   | 893  
|Fiscal 2011                            |  |   | 229  
|Thereafter                             |  |   |     
|                                       |  |   |      
|Total minimum lease payments           |  | $ | 1,618
|                                       |  |   |      



|* | Net of sublease income for subleases in the Companys Santa Clara facility through October 2008 and April 2010.
|- | ---------------------------------------------------------------------------------------------------------------



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On September 30, 2008, the Company received notice from the Landlord for its facility lease that the
Company would be in default of its lease if rent payment arrearages were not paid within five days of the date of notice. Such rent payment arrearages were not paid by the Company within five days of the date of notice and are not paid as of the
date of this filing. Therefore, the Company is in default of its headquarter facility lease agreement. Upon a default of the lease, the Landlord has the right to proceed against the Company for, among other things, late fees, unpaid rent,
attorneys fees and costs and possession of the premises. In addition, the Landlord shall have the right to apply the Companys security deposit of $176,500 to any rent or other amounts owed to the Landlord. Upon such application of the
security deposit, the Company shall be required to deposit with the Landlord an amount sufficient to restore the security deposit to its original amount and the Companys failure to timely restore the security deposit shall constitute a
material breach of the lease. The Company is currently in settlement negotiations with the Landlord, but cannot provide assurance as to whether a settlement agreement can be reached on acceptable terms, or at all.

Design tool software licenses

We have commitments
under time-based subscription licenses for design tool software of $285,000 for the remaining three months of fiscal 2009 and $285,000 in fiscal 2010. The Company is currently in settlement negotiations with its design tool software vendor, but
cannot provide assurance as to whether a settlement agreement can be reached on acceptable terms, or at all.



|12. | Product Warranty
|--- | ----------------

The Company generally sells its
products with a limited warranty and a limited indemnification of customers against intellectual property infringement claims. The Company accrues for known warranty and indemnification issues if a loss is probable and can be reasonably estimated,
and accrues for estimated incurred but unidentified claims based on historical activity. The accrual and the related expense for known claims was not significant as of and for the three and nine month periods ended October 26, 2008 and
October 28, 2007, due to product testing, the short time between product shipment and the detection and correction of product failures, and a low historical rate of payments on indemnification claims.



|13. | Recent Accounting Pronouncements
|--- | --------------------------------

In February 2007,
the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115 (SFAS 159). This statement allows entities to elect to
measure many financial instruments and certain other items that are similar to financial instruments at fair value that are not currently required to be measured at fair value. The election is made on an instrument-by-instrument basis and is
irrevocable. If the fair value option is elected for an instrument, the statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. Upon initial adoption, this statement provides entities with a
one-time chance to elect the fair value option for the eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings (cumulative deficit) in the
year the statement is adopted. SFAS 159 was effective for NeoMagic beginning on January 28, 2008. The Company did not make any elections for fair value accounting and therefore, it did not record a cumulative-effect adjustment to its opening
cumulative deficit balance.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), or
SFAS No. 141(R), Business Combinations. Under SFAS No. 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on the acquisition
date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date, and changes in accounting for
deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. In addition, acquired in-process research and development, or IPR&D is capitalized as an intangible asset and
amortized over its estimated useful life. We are required to adopt the provisions of SFAS No. 141(R) beginning with our fiscal quarter ending April 26, 2009. The adoption of SFAS No. 141(R) is expected to change our accounting
treatment for business combinations on a prospective basis beginning in the period it is adopted.

In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, or SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of Accounting Research Bulletin No. 51. SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parents ownership interest,
and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating this standard and therefore has not yet determined the impact that the adoption of SFAS 160 will have
on its consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued Statement of Financial
Accounting Standards No. 161, or SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. SFAS 161 requires enhanced disclosures about a companys derivative and
hedging activities. SFAS 161 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company is in the process of evaluating the impact of adopting the provisions of SFAS 161.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157
(FSP 157-2), to partially defer FASB Statement No. 157, Fair Value Measurements (FAS 157). FSP 157-2 defers by one year the effective date of FAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), which for NeoMagic is effective beginning January 26, 2009. We are currently evaluating the impact of
adopting the provisions of FSP 157-2.



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On April 25, 2008, the Financial Accounting Standards Board issued FASB Staff Position (FSP) FAS
142-3, Determination of the Useful Life of Intangible Asset (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The intent of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141(R), Business Combinations, and other U.S. generally accepted accounting principles. FSP 142-3 is effective for NeoMagic beginning January 26, 2009. Earlier adoption is
prohibited. The adoption of FSP 142-3 is expected to change our accounting treatment for recognized intangible assets in conjunction with business combinations on a prospective basis beginning in the period it is adopted.

In May 2008, the FASB issued SFAS No. 162 (SFAS 162), The Hierarchy of Generally Accepted Accounting Principles. This Statement
identifies the sources of accounting principles and the framework for selecting principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting
principles in the United States. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting Oversight Boards amendments to AU section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles. We do not expect SFAS 162 to have a material impact on our consolidated financial statements.

In October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
(FSP 157-3). FSP 157-3 clarified the application of Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements . FSP 157-3 demonstrated how the fair value of a financial asset is determined when the market for that
financial asset is inactive. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The implementation of this standard did not have an impact on our consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified
Public Accountants (AICPA) and the SEC did not or are not believed by management to have a material impact on the Companys present or future consolidated financial statements.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

When used in this discussion, the words expects, anticipates, believes and similar expressions are intended to
identify forward-looking statements. Such statements reflect managements current intentions and expectations. Examples of such forward-looking statements include statements regarding future revenues, expenses, losses and cash flows, the launch
of new products by NeoMagic and its customers and research and development activities. However, actual events and results could vary significantly based on a variety of factors including those set forth below under Item 1A of Part II. These
forward-looking statements speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any changes in the
Companys expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

Overview

We deliver semiconductor chips and software that provide solutions to enable new multimedia applications for handheld devices. Our
solutions offer low power consumption, small form-factor and high performance processing. As part of our complete system solution, we deliver a suite of middleware and sample applications for imaging, video and audio functionality, and we provide
multiple operating system ports with customized drivers for our products. Our product portfolio includes semiconductor solutions known as Applications Processors as well as other System-On-Chips (SOCs). Our Applications Processors are sold under the
MiMagic brand name with a focus on enabling high performance multimedia within a low power consumption environment. In mobile phones, our Applications Processors are designed to work side-by-side with baseband processors that are used
for communications functionality. Our SOC products dedicated for the mobile digital TV market are marketed under the NeoMobileTV and MiMagic brand names. Target customers for both our MiMagic and our NeoMobileTV products include
manufacturers of mobile phones and handheld devices. The largest projected market opportunity for our products is in the mobile phone market, where our products enable multimedia functionality.

On September 24, 2008, we announced a cessation of our efforts to raise additional capital. As a result, we proceeded with efforts to substantially
reduce our operating activities and reduce our on-going expenditures by terminating employment for substantially all of our operational and engineering employees in all worldwide locations. Beginning September 19, 2008, management, acting based
upon a plan approved by our Board of Directors, eliminated 52 positions in the Company. On September 23, 2008, the remaining independent directors of the Company, Brett Moyer, Carl Stork and David Tomasello, notified the Company that they were
resigning as directors of NeoMagic Corporation, effective September 23, 2008. We have initiated efforts for the orderly reduction of our operations, including the fulfillment of our outstanding sales and other contracts, headcount reductions,
securing continuing support for its existing customers, seeking purchasers for our intellectual property and tangible assets and providing for outstanding and anticipated liabilities. We anticipate that our operations will consist primarily of
supporting sales orders from our existing customers, collecting the resulting receivables from such sales orders, collecting proceeds from assets sold, satisfying obligations, and administration of the corporation.

On September 30, 2008, we announced that we had received notice from our landlord that we would be in default of our facility lease if rent payment
arrearages were not paid within five days of the date of notice. Such rent payment arrearages were not paid within five days of the date of notice and are not paid as of the date of this filing. Therefore, we are in default of our facility lease
agreement. Our landlord has the right to proceed against us for, among other things, late fees, unpaid rent, attorneys fees and costs and possession of the premises. In addition, the landlord has the right to apply our security deposit of
$176,500 to any rent or other amounts owed to the landlord. Upon such application of the security deposit, we are required to deposit with the landlord an amount sufficient to restore the security deposit to its original amount and our failure to
timely restore the security deposit shall constitute a material breach of the lease. Our facility lease for our headquarters in Santa Clara, California expires in April 2010. As of October 26, 2008, the Companys remaining operating lease
obligation was approximately $2,156,000.

On October 6, 2008, we announced that we received a Nasdaq Staff Determination letter
indicating that we did not comply with the minimum shareholders equity, market value of listed securities or net income requirements for continued listing set forth in Marketplace Rule 4310(c)(3), and that our common stock was therefore,
subject to delisting from The Nasdaq Capital Market. We did not seek to challenge the Staff determination and delisting since we would be unable to comply with these requirements in the near term. As a result, our common stock was delisted from The
Nasdaq Capital Market and trading of our common stock on The Nasdaq Capital Market was suspended at the opening of business on October 15, 2008.

At October 26, 2008, we had $119 thousand in cash and cash equivalents and $142 thousand in accounts receivable. We believe that this level of cash, cash equivalents and accounts receivable is not sufficient to
maintain continuing operations at current levels. We have been unable to raise additional capital to fund operating activities and have ceased efforts to do so. The adequacy of our resources will depend largely on our ability to achieve positive
operating cash flows principally through reductions in expenditures. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we are unable to reduce our operating expenditures to levels sufficiently below our
recurring revenues, we expect to take all appropriate actions to maximize the value of the Company. We are in the process of taking actions to achieve further reductions in our operating expenses. We also believe that we can take actions to generate
cash by selling or licensing intellectual property.

We are not generating sufficient cash from the sale of our products to support our
operations and have been incurring significant losses. We have been funding our operations primarily with the cash proceeds raised through the sale of certain patents in February 2008. We expect to incur additional losses and may have negative
operating cash flows through the end of our fiscal year in January 2009 and beyond. During the nine months ended October 26, 2008, we raised approximately $9.5 million through the sale of certain patents. Unless we are able to decrease expenses
substantially, we will not have sufficient cash to support our operations and may be forced to file for bankruptcy. We have taken steps to restructure our operations and reduce our monthly operational cash expenditures.

At October 26, 2008, we had $119 thousand in cash and cash equivalents as compared to $964 thousand at January 27, 2008.

There is no assurance that we will be successful in reducing our operating expenses, generating sufficient cash flows from operations or obtaining
sufficient funding from any source on acceptable terms, if at all. If we are unable to generate sufficient cash flows from our operations, we may not be able to continue operations as proposed, requiring us to modify our business plan, curtail
various aspects of our operations or cease operations. In such event, investors may lose a portion or all of their investment. The report of our independent registered public accounting firm, in respect of our 2008 fiscal year, includes an
explanatory going concern paragraph regarding substantial doubt as to our ability to continue as a going concern, which indicates an absence of obvious or reasonably assured sources of future funding that will be required by us to maintain ongoing
operations.

The Companys fiscal year end is the last Sunday in January. The third fiscal quarters of 2009 and 2008 ended on
October 26, 2008 and October 28, 2007, respectively. The Companys quarters generally have 13 weeks. The third quarters of fiscal 2009 and fiscal 2008 had 13 weeks. The Companys fiscal years generally have 52 weeks.



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##### Table of Contents

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of such statements requires us to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period and the reported amounts of assets and liabilities as of the date of the
financial statements. Our estimates are based on historical experience and other assumptions that we consider to be appropriate in the circumstances. However, actual future results may vary materially from our estimates.

We believe that the following accounting policies are critical as defined by the SEC, in that they are both highly important to the portrayal
of our financial condition and results, and require difficult management judgments and assumptions about matters that are inherently uncertain:



|1. | revenue recognition;
|-- | --------------------



|2. | inventory valuation;
|-- | --------------------



|3. | deferred taxes and tax accruals; and
|-- | ------------------------------------



|4. | fair value of equity instruments.
|-- | ---------------------------------

There have been no
significant changes to these policies from the disclosures noted in our Annual Report on Form 10-K for the fiscal year ended January 27, 2008.

Results of Operations

Revenue

Net revenue was $500 thousand for the three months ended October 26, 2008, compared to $620 thousand for the three months ended October 28, 2007, and consisted entirely of net product revenue in both quarters. Net revenue was
approximately $1.5 million and $1.3 million for the nine months ended October 28, 2008 and October 28, 2007, respectively. There was no licensing revenue during any of the periods reported. Net product revenue decreased in the third fiscal
quarter of 2009 relative to the third fiscal quarter of 2008 primarily due to an approximately $362 thousand reduction in shipments of our MiMagic 6+ applications processor, partially offset by an approximately $261 thousand increase in shipments of
our MiMagic 3 applications processor. The increased shipments of our MiMagic 3 application processor were primarily due to shipments to Flextronics for production in Singapore for use in an automated toll-collection system. The decrease in shipments
of our MiMagic 6+ application processor was primarily due to decreased shipments to Neonode for use in a mobile phone application. Net product revenue increased during the nine months ended October 26, 2008 relative to the nine months ended
October 28, 2007 primarily due to an approximately $766 thousand increase in shipments of our MiMagic 3 applications processor, offset by an approximately $1.4 million decrease in shipments of our MiMagic 6+ applications processor. The increase
in shipments of our MiMagic 3 applications processor during the first nine months of fiscal 2009 relative to the same period in fiscal 2008 was driven by increased demand from Flextronics, as previously noted. The decrease in shipments of our
MiMagic 6+ applications processor during the first nine months of fiscal 2009 relative to the same period in fiscal 2008 was driven by a decrease in demand from Neonode as well as a decrease in demand from Seijin Electron for a mobile TV
application. This MiMagic 6+ program of Sejin Electron is no longer active. Sejin has discontinued marketing efforts for this program due to limited demand for this type of stand-alone mobile TV product.

Product sales to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United
States, and foreign system manufacturers that sell to United States-based OEMs) accounted for 100% and 95% of product revenue in the three months ended October 26, 2008 and October 28, 2007, respectively. During the nine months ended
October 26, 2008 and October 28, 2007, product sales to customers located outside the United States accounted for 99% and 95% of product revenue, respectively. In the first nine months of fiscal 2009, 88% of our revenue resulted from the
sales of our MiMagic 3 application processors to Flextronics for production in Singapore for use in an automated toll-collection system. In the first nine months of fiscal 2008, 61% of our revenue resulted from sales of our MiMagic 6+ application
processors to Sejin Electron and Neonode for mobile television and mobile phone applications. We expect that export sales will continue to represent the majority of our product revenue.

Our customer base can shift significantly from period to period as some customer programs end and new programs do not always emerge to replace them. In
addition, new customers are often added from period to period. All sales transactions were denominated in United States dollars. The following table summarizes the Companys product revenue by major geographic area:



|              |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|------------- |  | ------------------ | - |  | ----------------- | - |  | --------------- | - |  | --------------- | -
|              |  | Three Months Ended |   |  | Nine Months Ended |  
|              |  | October 26,2008    |   |  | October 28,2007   |   |  | October 26,2008 |   |  | October 28,2007 |  
|Singapore     |  | 88                 | % |  | 32                | % |  | 86              | % |  | 16              | %
|Korea         |  | 11                 | % |  | 2                 | % |  | 9               | % |  | 32              | %
|Sweden        |  | 0                  | % |  | 59                | % |  | 0               | % |  | 42              | %
|United States |  | 0                  | % |  | 5                 | % |  | 1               | % |  | 5               | %
|Japan         |  | 0                  | % |  | 2                 | % |  | 0               | % |  | 1               | %
|Hong Kong     |  | 0                  | % |  | 0                 | % |  | 4               | % |  | 0               | %
|Malaysia      |  | 0                  | % |  | 0                 | % |  | 0               | % |  | 3               | %
|England       |  | 0                  | % |  | 0                 | % |  | 0               | % |  | 1               | %
|Taiwan        |  | 1                  | % |  | 0                 | % |  | 0               | % |  | 0               | %
|              |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|              |  | 100                | % |  | 100               | % |  | 100             | % |  | 100             | %
|              |  |                    |   |  |                   |   |  |                 |   |  |                 |  



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##### Table of Contents

The following customers accounted for more than 10% of product revenue:



|                    |  |                    |   |  |                   |   |  |                 |   |  |                 |  
|------------------- |  | ------------------ | - |  | ----------------- | - |  | --------------- | - |  | --------------- | -
|                    |  | Three Months Ended |   |  | Nine Months Ended |  
|                    |  | October 26,2008    |   |  | October 28,2007   |   |  | October 26,2008 |   |  | October 28,2007 |  
|Flextronics         |  | 88                 | % |  | 32                | % |  | 86              | % |  | 16              | %
|Exadigm, Inc.       |  | 7                  | % |  | *                 |   |  | *               |   |  | *               |  
|Neonode             |  | *                  |   |  | 59                | % |  | *               |   |  | 42              | %
|Sejin Electron Inc. |  | *                  |   |  | *                 |   |  | *               |   |  | 24              | %



|* | Represents less than 10% of net revenue
|- | ---------------------------------------

Gross Profit (Loss)

Gross loss for the three months ended October 26, 2008 was $968 thousand compared to a gross profit of $237 thousand for the three
months ended October 28, 2007. The gross loss in the third quarter of fiscal 2009 was primarily due to $1.2 million of charges for the write-down of MiMagic 6+ inventories to anticipated market value where ending on-hand quantities exceeded the
foreseeable customer requirements due to lack of customer demand and cessation of marketing efforts for these products. These charges were partially offset by approximately $250 thousand of gross margin on the sale of MiMagic 3 products. Gross loss
for the nine months ended October 26, 2008 was $3.1 million as compared to a gross profit of $290 thousand for the nine months ended October 28, 2007. The reduction in gross profit to a gross loss for the first nine months of fiscal 2009
as compared to the same period in fiscal 2008 was driven by a shift from reserve releases of $157 thousand in fiscal 2008 to charges for inventory write-downs of approximately $3.4 million in fiscal 2009, partially offset by approximately $0.6
million of gross margin on the sale of MiMagic 3 products.

Research and Development Expenses

Research and development expenses are primarily directed to development for the mobile television, wireless IP camera, and multimedia-enriched handsets
markets. Research and development expenses include compensation and associated costs relating to development personnel, outside engineering consulting, amortization of intangible assets and prototyping costs, which are comprised of photomask costs
and pre-production wafer costs. Research and development expenses were approximately $1.4 million and $2.9 million for the three months ended October 26, 2008 and October 28, 2007, respectively. Research and development expenses decreased
in the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008 primarily due to the reduction in work force events in July and September 2008, which reduced labor and compensation costs, as well as the cessation of semiconductor
product development activities. For the nine months ended October 26, 2008 and October 28, 2007, research and development expenses were $7.6 million and $8.9 million, respectively. The decrease in research and development expenses during
the first nine months of fiscal 2009 compared to the first nine months of fiscal 2008 was driven again by reduction in work force events in July and September 2008 and the cessation of semiconductor product development activities. We anticipate
significantly reduced research and development expenses in the future.

Sales, General and Administrative Expenses

Sales, general and administrative expenses were $1.2 million and $2.0 million for the three months ended October 26, 2008 and October 28, 2007,
respectively. Sales, general and administrative expenses decreased due the reduction in work force events in July and September 2008, which reduce labor and compensation costs. For the nine months ended October 26, 2008 and October 28,
2007, sales, general and administrative expenses were $4.5 million and $5.3 million, respectively. The decrease in sales, general and administrative expenses was driven again by the reduction in work force events in July and September 2008. We
anticipate significantly reduced sales, general and administrative expenses in the future.

Restructuring Expenses

In September 2008, acting according to a plan approved by our board of directors, our executive management approved and communicated to our employees
efforts to substantially reduce our operating activities and reduce our on-going expenditures by terminating employment for substantially all of our operational and engineering employees in all worldwide locations. Beginning September 19, 2008,
management eliminated 52 positions in the Company, to reduce operating expenses and improve the Companys cost structure. These actions are part of the Companys strategy to create a more streamlined and effective business and cost
structure. In conjunction with these restructuring activities, we recorded expenses of approximately $1.5 million, comprised of approximately $737 thousand of severance related costs, $12 thousand of contract termination expenses, and $767 thousand
of asset impairment charges related to design automation software tools due to the cessation of semiconductor product development efforts.

Gain on Sale
of Patents

There were no patent sales in the third quarter of fiscal 2009. In the first quarter of fiscal 2009, we completed the sale
of 18 non-essential patents, which included our embedded DRAM patents, and a patent application to Faust Communications Holdings, LLC for $12.5 million, providing net proceeds of $9.5 million after agency commissions. We have retained a worldwide,
non-exclusive, royalty-free license to use the technology covered by these patents and patent application for all of our current and future products. The patents sold in the first quarter of fiscal 2009 do not relate to products NeoMagic currently
sells or plans to sell. There were no patent sales in the first nine months of fiscal 2008.

Stock Compensation

Stock compensation expense was $166 thousand and $437 thousand for the three months ended October 26, 2008 and October 28, 2007, respectively.
For the first nine months of fiscal 2009 and fiscal 2008, stock compensation expense was $1.1 million and $1.4 million, respectively. Stock compensation expense recorded in cost of revenues, research and development expenses and selling, general and
administrative expenses for the three and nine month periods reported represents the amortization of the fair value of share-based payments made to employees and members of our board of directors in the form of stock options and purchases under the
employee stock purchase plan as we adopted the provision of SFAS No. 123 (R) on the first day of fiscal 2007 (See Note 2). The fair value of stock options granted and rights granted to purchase our common stock under the employee stock
purchase plan is recognized as expense over the employee requisite service period.

Interest Income and Other

The Company earns interest on its cash, cash equivalents and short-term investments. Interest and other income was $69 thousand and $57 thousand for the
three months ended October 26, 2008 and October 28, 2007, respectively. For the first nine months of fiscal 2009 and fiscal 2008, interest and other income was $170 thousand and $462 thousand, respectively. The decrease is primarily due to
lower average cash, cash equivalent and short-term investment balances and decreased interest rates.



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Interest Expense

Interest expense was $7 thousand and $13 thousand for the three months ended October 26, 2008 and October 28, 2007, respectively. For the first nine months of fiscal 2009 and fiscal 2008, interest expense
was $26 thousand and $54 thousand, respectively. Interest expense recorded in the first nine months of fiscal 2009 and fiscal 2008, represents interest on our capital lease obligations (See Note 8). The decreased interest expense is due to declining
principal balances.

Loss on Marketable Equity Securities

In January 2006, the Company made a $200 thousand minority equity investment in Neonode, Inc. (Neonode), a then privately held mobile telephone company. In August 2007, effective upon the merger of Neonode
with a subsidiary of SBE, Inc. (SBE), SBE changed its name to Neonode, Inc. and its common stock is now publicly traded on the Nasdaq Stock Exchange (NEON). Upon the merger of SBE and Neonode, the Companys investment
converted into approximately 127,000 shares of Neonode common stock. The investment is classified as an available for sale security and had a fair value of less than $1,000 on October 26, 2008 and $471 thousand on January 27, 2008. We have
evaluated the fair value of the Neonode securities as of October 26, 2008, and consider the decline since the January 27, 2008 to be other than temporary, and accordingly, we have recorded impairment losses of $37 thousand and $191
thousand in the three and nine months ended October 26, 2008, respectively, in Other income (expense), net in the Statement of Operations. As of January 27, 2008, the fair value reflected a gross unrealized gain of $271 thousand.

Gain from Change in Fair Value of Warrant Liability

The Company recorded gains of $4 thousand and $15 thousand in the third quarters of fiscal 2009 and 2008, respectively, for the change in fair value on revaluation of its warrant liability associated with its warrants
issued on December 6, 2006 (the 2006 Warrants). For the first nine months of fiscal 2009 and fiscal 2008, the Company recorded gains $38 thousand and $758 thousand, respectively. The Company is required to revalue certain of the
2006 Warrants at the end of each reporting period and reflect in the statement of operations a gain or loss for the change in fair value of the warrant liability in the period in which the change occurred. We calculate the fair value of the warrants
outstanding using the Black-Scholes model (see Note 8). Following the warrant exchange in the second quarter of fiscal 2008, the number of 2006 Warrants subject to quarterly re-evaluation has decreased from warrants to purchase 1,250,000 shares to a
warrant to purchase 50,000 shares, which significantly decreased the magnitude of the revaluation for the first nine months of fiscal 2009. A gain results principally from a decline in the Companys share price during the period and a loss
results principally from an increase in the Companys share price.

Income Taxes

Income tax expense was $4 thousand and $7 thousand for the three months ended October 26, 2008 and October 28, 2007, respectively. For the first
nine months of fiscal 2009, income tax expense was $27 thousand and the Company recorded an income tax benefit of $444 thousand for the similar period of fiscal 2008. We recorded tax provisions of $4 thousand and $27 thousand, notwithstanding
incurring losses before income taxes of $5.0 million and $7.3 million, respectively, in the three and nine months ended October 26, 2008, respectively, primarily due to foreign income taxes. We did not record a provision for domestic income
taxes in the first nine months of fiscal 2009, as we anticipate an operating loss for the fiscal year. We recorded a tax benefit of $444 thousand on a loss before income taxes of $12.7 million in the nine months ended October 28, 2007 that
consisted primarily of foreign income taxes and a reduction in income tax payable of $481 thousand for the settlement of an income tax assessment by the State of Texas.

Liquidity and Capital Resources

At October 26, 2008, the Company had $119 thousand in cash and
cash equivalents and short-term investments, and $142 thousand in accounts receivable as compared to $1.5 million of cash, cash equivalents and short-term investments and $0.5 million in accounts receivable at January 27, 2008. The Company
believes that this level of cash, cash equivalents and accounts receivable is not sufficient to maintain continuing operations at current levels. Accordingly, there is substantial doubt about the Companys ability to continue as a going
concern. The audit report of our independent registered public accounting firm with respect to our fiscal year ended January 27, 2008, was modified by adding an explanatory paragraph for a going concern. The Company has been unable
to raise additional capital to fund operating activities and has ceased efforts to do so. The adequacy of the Companys resources will depend largely on its ability to achieve positive operating cash flows principally through reductions in
expenditures. If the Company is unable to reduce operating expenditures to levels sufficiently below its recurring revenues, it expects to take all appropriate actions to maximize the value of the Company. The Company is in the process of taking
actions to achieve further reductions in its operating expenses. The Company also believes that it can take actions to generate cash by selling or licensing intellectual property.

Cash and cash equivalents used in operating activities was $10.6 million and $13.6 million for the nine months ended October 26, 2008 and
October 28, 2007, respectively. The net cash used in operating activities for the nine months ended October 26, 2008 was primarily due to net losses of $7.3 million reduced by the non-operating gain on the sale of patents of $9.5 million,
which were partially offset by non-cash charges for inventory write-downs of $3.4 million, stock-based compensation expenses of $1.1 million and depreciation expenses of $0.8 million. Reductions in working capital assets and liabilities generated
$0.7 million of cash inflows from operating activities, comprised principally of a decrease in accounts receivable of $0.4 million, a decrease in other current assets of $0.4 million, an increase in compensation and related benefits accruals of $0.1
million, partially offset by a reduction in income taxes payable of $0.3 million. The cash used in operating activities for the nine months ended October 28, 2007 was primarily due to the net loss of $12.3 million, the change in fair value on
revaluation of warrant liability of $0.8 million, and the reversal of the provision for a tax liability of $0.5 million, partially offset by non-cash stock-based compensation of $1.4 million and depreciation of $0.9 million. Requirements for working
capital assets and liabilities drove cash usage in operations of approximately $2.3 million, comprised principally of an increase in inventory of $3.0 million and an increase in accounts receivable of $0.2 million, partially offset by an increase in
other accruals of $0.4 million, an increase in compensation and related benefit accruals of $0.3 million and an increase in accounts payable of $0.2 million.

Net cash provided by investing activities for the nine months ended October 26, 2008 was $9.9 million, compared to $0.6 million of net cash used in investing activities for the nine months ended October 28,
2007. The net cash provided by investing activities for the nine months ended October 26, 2008 was primarily due to the net proceeds from the sale of patents of $9.5 million and the maturities of short-term investments of $3.5 million,
partially offset by purchases of short-term investments of $3.0 million. The net cash used in investing activities for the nine months ended October 28, 2007 was primarily due to net purchases of short-term investments of $0.5 million and
purchases of property and equipment of $0.1 million.

Net cash used in financing activities was $ 0.2 million for the nine months
ended October 26, 2008, compared to $ 0.5 million of net cash used in financing activities for the nine months ended October 28, 2007. The net cash used in financing activities for the nine months ended October 26, 2008 and
October 28, 2007 was principally due to payments on capital lease obligations of $0.2 million and $0.8 million, respectively. These payments were partially offset by net proceeds from the issuance of common stock of $0.1 million and $0.3
million, for the nine months ended October 26, 2008 and October 28, 2007, respectively.

Our lease for our headquarters in Santa
Clara, California expires in April 2010. We lease offices in Israel and India under operating leases that expire in September 2008 and in December 2008, respectively. In December 2006, we amended a sublease agreement to extend the term for the
sublease of 10,000 square feet of our Santa Clara facility to a third party through October 2008. In July 2008, we subleased an additional 11,000 square feet of our Santa Clara facility to a different third party through April 2010.



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We lease software licenses under capital leases (see Note 8).

Contractual Obligations

The following summarizes the
Companys contractual obligations at October 26, 2008, and the effect such obligations are expected to have on our liquidity and cash flow (in thousands):



|                                   |  |             |     |      |   |       |  |            |     |       |   |   |  |   |      
|---------------------------------- |  | ----------- | --- | ---- | - | ----- |  | ---------- | --- | ----- | - | - |  | - | -----
|                                   |  | Fiscal Year
|                                   |  | 2009        |     | 2010 |   | 2011  |  | Thereafter |     | Total
|CONTRACTUAL OBLIGATIONS            |  |             |     |      |   |       |  |            |     |       |   |   |  |   |      
|Operating leases                   |  | $           | 496 |      | $ | 893   |  | $          | 229 |       | $ |  |  | $ | 1,618
|Capital leases                     |  |             | 88  |      |   | 354   |  |            |    |       |   |  |  |   | 442  
|Design tool software licenses      |  |             | 285 |      |   | 285   |  |            |    |       |   |  |  |   | 570  
|Non-cancelable purchase orders     |  |             | 28  |      |   |      |  |            |    |       |   |  |  |   | 28   
|                                   |  |             |     |      |   |       |  |            |     |       |   |   |  |   |      
|Total contractual cash obligations |  | $           | 897 |      | $ | 1,532 |  | $          | 229 |       | $ |  |  | $ | 2,658
|                                   |  |             |     |      |   |       |  |            |     |       |   |   |  |   |      

On September 30, 2008, we received notice from our landlord for our facility lease that we
would be in default of our lease if rent payment arrearages were not paid within five days of the date of notice. Such rent payment arrearages were not paid within five days of the date of notice and are not paid as of the date of this filing.
Therefore, we are in default of our headquarter facility lease agreement. Upon a default of the lease, our landlord has the right to proceed against us for, among other things, late fees, unpaid rent, attorneys fees and costs and possession of
the premises. In addition, our landlord has the right to apply our security deposit of $176,500 to any rent or other amounts owed to the landlord. Upon such application of the security deposit, we are required to deposit with the landlord an amount
sufficient to restore the security deposit to its original amount and our failure to timely restore the security deposit shall constitute a material breach of the lease. We are currently in settlement negotiations with the landlord, but cannot
provide assurance as to whether a settlement agreement can be reached on acceptable terms, or at all.

Capital lease obligations

In January 2009, the Company settled in full its outstanding obligation under capital leases for a cash payment of $25,000.

Design tool software licenses

We have commitments
under time-based subscription licenses for design tool software of $285,000 for the remaining three months of fiscal 2009 and $285,000 in fiscal 2010. We are currently in settlement negotiations with our design tool software vendor, but cannot
provide assurance as to whether a settlement agreement can be reached on acceptable terms, or at all.

Off-Balance Sheet Arrangements

As of October 26, 2008, we had no off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K.

Recent Accounting Pronouncements

Please refer to
Note 13 of Notes to our condensed consolidated financial statements included in Item 1 of Part I for a discussion of the expected impact of recently issued accounting standards.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Not Applicable.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

The Companys management, with the participation of the Companys Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of the end of the period covered by this report. Based on such evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Companys disclosure
controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

Changes in Internal Controls

During the third
quarter of fiscal 2009, there were no changes in the Companys internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



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Inherent Limitations on Effectiveness of Controls

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the risk of exercise of
judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate the risk of misconduct completely. Accordingly, any system of internal control over financial reporting can only provide
reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate. We intend to continue to monitor and upgrade our internal controls as necessary or appropriate for our business, but we cannot assure that such improvements will be sufficient to provide us with effective
internal control over financial reporting.

Part II. Other Information



|Item 1A. | Risk Factors
|-------- | ------------

The factors discussed below are
cautionary statements that identify important risk factors that could cause actual results to differ materially from those anticipated in the forward-looking statements in this Quarterly Report on Form 10-Q. If any of the following risks actually
occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock could decline and investors might lose all or part of their investment in our common stock.

We Need Additional Capital and We Have Substantially Reduced our Operating Activities

At October 26, 2008, we had $119 thousand in cash and cash equivalents and $142 thousand in accounts receivable. We believe that this level of cash,
cash equivalents and accounts receivable is not sufficient to maintain continuing operations at current levels. We have been unable to raise additional capital to fund operating activities and have ceased efforts to do so. The adequacy of our
resources will depend largely on our ability to achieve positive operating cash flows principally through reductions in expenditures. These uncertainties raise substantial doubt about our ability to continue as a going concern. If we are unable to
reduce our operating expenditures to levels sufficiently below our recurring revenues, we expect to take all appropriate actions to maximize the value of the Company. We are in the process of taking actions to achieve further reductions in our
operating expenses. We also believe that we can take actions to generate cash by selling or licensing intellectual property.

We are not
generating sufficient cash from the sale of our products to support our operations and have been incurring significant losses. We have been funding our operations primarily with the cash proceeds raised through the sale of certain patents in
February 2008. We expect to incur additional losses and may have negative operating cash flows through the end of our fiscal year in January 2009 and beyond. During the nine months ended October 26, 2008, we raised approximately $9.5 million
through the sale of certain patents. Unless we are able to decrease expenses substantially, we will not have sufficient cash to support our operations and may be forced to file for bankruptcy. We have taken steps to restructure our operations and
reduce our monthly operational cash expenditures.

There is no assurance that we will be successful in reducing our operating expenses,
generating sufficient cash flows from operations or obtaining sufficient funding from any source on acceptable terms, if at all. If we are unable to generate sufficient cash flows from our operations, we may not be able to continue operations as
proposed, requiring us to modify our business plan, curtail various aspects of our operations or cease operations. In such event, investors may lose a portion or all of their investment. The report of our independent registered public accounting
firm, in respect of our 2008 fiscal year, includes an explanatory going concern paragraph regarding substantial doubt as to our ability to continue as a going concern, which indicates an absence of obvious or reasonably assured sources of future
funding that will be required by us to maintain ongoing operations.

On September 24, 2008, we announced a cessation of our efforts to
raise additional capital. As a result, we proceeded with efforts to substantially reduce our operating activities and reduce our on-going expenditures by terminating employment for substantially all of our operational and engineering employees in
all worldwide locations. Beginning September 19, 2008, management, acting based upon a plan approved by our Board of Directors, eliminated 52 positions in the Company. On September 23, 2008, the remaining independent directors of the
Company, Brett Moyer, Carl Stork and David Tomasello, notified the Company that they were resigning as directors of NeoMagic Corporation, effective September 23, 2008. We have initiated efforts for the orderly reduction of our operations,
including the fulfillment of our outstanding sales and other contracts, headcount reductions, securing continuing support for its existing customers, seeking purchasers for our intellectual property and tangible assets and providing for outstanding
and anticipated liabilities. We anticipate that our operations will consist primarily of supporting sales orders from our existing customers, collecting the resulting receivables from such sales orders, collecting proceeds from assets sold,
satisfying obligations, and administration of the corporation.

We Have a Limited Customer Base

In each of the last three fiscal years, three customers have accounted for over two-thirds of our product revenue. In the first nine months of fiscal
2009, one customer accounted for 86% of product revenue. In fiscal 2008, the top three customers accounted for 50%, 20%, and 14%, respectively, of product revenue. In addition, one licensee accounted for 100% of our licensing revenue in fiscal 2006.
There has been no licensing revenue in fiscal 2009 to date, nor in 2008 and 2007. We expect that a small number of customers will continue to account for a substantial portion of our product revenue for the foreseeable future. Furthermore, the
majority of our sales were made, and are expected to continue to be made, on the basis of purchase orders rather than pursuant to long-term purchase agreements. As a result, our business, financial condition and results of operations could be
materially adversely affected by the decision of a single customer to cease using our products, or by a decline in the number of handheld devices sold by a single customer.

We May Lose Our Customer Base

Our products are designed to afford the mobile phone and handheld
device manufacturer significant advantages with respect to product performance, power consumption and product size. To the extent that other future developments in components or subassemblies incorporate one or more of the advantages offered by our
products, the market demand for our products may be negatively impacted.

We Have Been Delisted from The Nasdaq Stock Market

On October 6, 2008, we announced that we received a Nasdaq Staff Determination letter indicating that we did not comply with the minimum
shareholders equity, market value of listed securities or net income requirements for continued listing set forth in Marketplace Rule 4310(c)(3), and that our common stock was therefore, subject to delisting from The Nasdaq Capital Market. We
did not seek to challenge the Staff determination and delisting since we would be unable to comply with these requirements in the near term. As a result, our common stock was delisted from The Nasdaq Capital Market and trading of our common stock on
The Nasdaq Capital Market was suspended at the opening of business on October 15, 2008. Trading in our common stock is now conducted through the over-the-counter market or on the Electronic Bulletin Board of the National Association of
Securities Dealers, Inc. There is no guarantee that an active trading market for our common stock will be maintained on any exchange. You may not be able to sell your shares of our stock quickly, at the market price or at all, if trading in our
stock is not active.



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A Lack of Effective Internal Control Over Financial Reporting Could Result in an Inability to Accurately Report Our
Financial Results

Effective internal controls are necessary for us to provide reliable financial reports. If we do not provide reliable
financial reports or prevent fraud, we will be subject to potential liability and may have to incur expenses to defend the Company against governmental proceedings or private litigation and/or to pay fines or damages. Such proceedings would also
require significant management time and would distract management from focusing on the business. Failing to provide reliable financial reports would also cause loss of reputation in the investor community and would likely result in a decrease in our
stock price.

In connection with managements evaluation of our internal control over financial reporting as of July 29, 2007,
management identified control deficiencies that constituted a material weakness. Our management concluded that we did not maintain effective controls over our revenue recognition processes. These control deficiencies resulted in our recording of a
material adjustment to the financial statements for the second quarter of fiscal 2008 before their issuance. As a result of the material weakness, our management concluded that our internal control over financial reporting was not effective as of
July 29, 2007 and October 28, 2007. The material weakness was remediated as of January 27, 2008 and management concluded that its internal control over financial reporting was effective as of January 27, 2008 and October 26,
2008.

A failure to implement and maintain effective internal control over financial reporting, could result in a material misstatement of
our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse
effect on our stock price.

Our Revenues Are Difficult To Predict

For a variety of reasons, our revenues are difficult to predict and may vary significantly from quarter to quarter. Our ability to achieve design wins depends on a number of factors, many of which are outside of our
control, including changes in the customers strategic and financial plans, competitive factors and overall market conditions. As our experience demonstrates, design wins themselves do not always lead to production orders because the customer
may cancel or delay products for a variety of reasons. Such reasons may include the performance of a particular product that may depend on components not supplied by NeoMagic, market conditions, reorganizations or other internal developments at the
customer and changes in customer personnel or strategy. Even when a customer has begun volume production of a product containing our chips, volumes are difficult to forecast because there may be no history to provide a guide, and because market
conditions and other factors may cause changes in the customers plans. Because of the market uncertainties they face, many customers place purchase orders on a short lead-time basis, rather than providing reliable long-term purchase orders or
purchase forecasts. Our customer base can shift significantly from period to period as existing customer programs end and new programs do not always replace ending programs. All of these factors make it difficult to predict our revenues from period
to period.

The difficulty in forecasting revenues increases the difficulty in anticipating our inventory requirements. This difficulty
increases the likelihood that we may overproduce particular parts, resulting in inventory write-downs, or under-produce particular parts, affecting our ability to meet customer requirements. The difficulty in forecasting revenues also restricts our
ability to provide forward-looking revenue and earnings guidance to the financial markets and increases the chance that our revenue performance does not match investor expectations.

We May Encounter Inventory Excess or Shortage

To have product inventory to meet potential customer
purchase orders, we place purchase orders for semiconductor wafers from our manufacturer in advance of having firm purchase orders from our customers. We had binding orders for wafers totaling approximately $28 thousand outstanding as of
October 26, 2008. If we do not have sufficient demand for our products and cannot cancel our current and future commitments without material impact, we may experience excess inventory, which will result in an inventory write-down affecting
gross margin and results of operations. If we cancel a purchase order, we must pay cancellation penalties based on the status of work in process or the proximity of the cancellation to the delivery date. We must place purchase orders for wafers
before we receive purchase orders from our own customers. This limits our ability to react to fluctuations in demand for our products, which can be unexpected and dramatic, and from time to time will cause us to have an excess or shortage of wafers
for a particular product. As a result of the long lead-time for manufacturing wafers and the increase in just-in-time ordering by customers, semiconductor companies from time-to-time take charges for excess inventory. We have in fact
incurred such charges in fiscal 2009 of $3.4 million, in fiscal 2008 of $0.4 million, in fiscal 2007 of $12 thousand and in fiscal 2006 of $0.2 million. Significant write-downs for excess inventory have had and could continue to have a material
adverse effect on our financial condition and results of operations. Conversely, failure to order sufficient wafers would cause us to miss revenue opportunities and, if significant, could impact sales by our customers, which could adversely affect
our customer relationships and thereby materially adversely affect our business, financial condition and results of operations.

We Face Intense
Competition in Our Markets

The market for Applications Processors is intensely competitive and is characterized by rapid technological
change, evolving industry standards and declining average selling prices. We believe that the principal factors of competition in this market are audio/video performance, price, features, power consumption, product size and customer support as well
as company stability. Our ability to compete successfully in the Applications Processor market depends on a number of factors, including success in designing and subcontracting the manufacture of new products that implement new technologies, product
quality and reliability, price, ramp of production of our products, customer demand and acceptance of more sophisticated multimedia functionality on mobile phones and other handheld devices, end-user acceptance of our customers products,
market acceptance of competitors products and general economic conditions. Our ability to compete will also depend on our ability to identify and ensure compliance with evolving industry standards and market trends. Our small size and
perceived instability are negative factors in competing for business.

We compete with both domestic and foreign companies, some of which
have substantially greater financial and other resources than us with which to pursue engineering, manufacturing, marketing and distribution of their products. Our main competitors include Texas Instruments, Renesas, Marvell, Freescale, ST
Microelectronics, Broadcom, Mediatek, Mtekvision, Core Logic, Telechips and C&S Technologies. We may also face increased competition from new entrants into the market, including companies currently in the development stage. We believe we have
significant intellectual properties and have historically demonstrated expertise in SOC technology. However, if we cannot timely introduce new products for our markets, support these products in customer programs, or manufacture these products, such
inabilities could have a material adverse effect on our business, financial condition and operating results.

Some of our current and
potential competitors operate their own manufacturing facilities. Since we do not operate our own manufacturing facility and may from time-to-time make binding commitments to purchase products, we may not be able to reduce our costs and cycle time
or adjust our production to meet changing demand as rapidly as companies that operate their own facilities, which could have a material adverse effect on our results of operations. In addition, if production levels increase the value of binding
purchase orders may increase significantly.

Uncertainty Regarding Future Licensing Revenue and Gain on Sale of Patents

In the third quarter of fiscal 2006, we collected gross licensing revenue of $8.5 million ($5.6 million net of commissions and expenses) from the
nonexclusive licensing of all of our patents to Sony Corporation of Tokyo, Japan. In February 2008, we sold 18 patents and one patent application to Faust Communications, LLC for net proceeds of $9.5 million. In June 2006, we sold 4 patents to
Samsung Electronics Co. Ltd. for net proceeds of $1.0 million. In April 2005, we sold 58 patents to Faust Communications, LLC for net proceeds of $3.5 million. The patents sold related to products we no longer sell and not to products that we
currently sell or plan to sell. We retained a worldwide, non-exclusive license under the patents sold. The sales did not include our important patents covering the unique array processing technology used in our newer MiMagic and NeoMobileTV
products. We cannot assure you that we will be able to generate any future licensing revenue or gains on sales of patents from our remaining 15 patents as of October 26, 2008, or from any future patents that we will own or have the right to
license. The licensing agreement



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with Sony may be the only licensing agreement that we ever complete and the patent sales noted above may be the only patent sales we complete. Furthermore,
if we should in the future complete an agreement to license or sell our patents, we cannot assure you that the proceeds we receive from such transaction will be as significant as the proceeds we received from Sony and Faust.

We Depend on Qualified Personnel

Our future success
depends in part on the continued service of our key engineering, sales, marketing, manufacturing, finance and executive personnel, and our ability to identify, hire and retain additional personnel to serve potential customers in our targeted
markets. There is strong competition for qualified personnel in the semiconductor industry, and we cannot assure you that we will be able to continue to attract and retain qualified personnel necessary for the development of our business. We have
experienced the loss of personnel both through headcount reductions and attrition. In the past two years we have lost some of our executive management, including Jeffery Blanc (Vice President, Worldwide Sales). Pierre-Yves Couteau (Vice President of
Marketing), Deepraj Puar (Vice President of Operations, and Scott Sullinger (CFO). Steve Berry joined NeoMagic on August 6, 2007 as CFO. Mr. Berry left the Company in January 2009.

All our executive officers are employees at will. We have employment contracts with Douglas R. Young, our chief executive officer, and Syed
Zaidi, our chief operating officer, and until his departure in January 2009 with Steve Berry, our chief financial officer. Until their departure in September 2008, we had employment contracts with Deepraj Puar, our vice president of operations, and
Pierre-Yves Couteau, our vice president of marketing. The employment contracts allow us to terminate their employment at any time but require us to make severance payments depending upon the circumstances surrounding termination of employment. We do
not maintain key person insurance on any of our personnel. If we are not able to retain key personnel, if our headcount is not appropriate for our future direction, or if we fail to recruit key personnel critical to our future direction in a timely
manner, this may have a material adverse effect on our business, financial condition and results of operations.

In addition, our future
success will depend in part on our ability to identify and retain qualified individuals to serve on our board of directors. We believe that maintaining a board of directors comprised of qualified members is critical given the current status of our
business and operations. Moreover, SEC and Nasdaq Capital Market rules require that three independent board members serve on our audit committee. Any inability on our part to identify and retain qualified board members could have a material adverse
effect on our business or could lead to the delisting of our securities from the Nasdaq Capital Market.

Our Products May be Incompatible with Evolving
Industry Standards and Market Trends

Our ability to compete in the future will also depend on our ability to identify and ensure
compliance with evolving industry standards and market trends. Unanticipated changes in market trends and industry standards could render our products incompatible with products developed by major hardware manufacturers and software developers. As a
result, we could be required to invest significant time and resources to redesign our products or obtain license rights to technologies owned by third parties to comply with relevant industry standards and market trends. We cannot assure you that we
will be able to redesign our products or obtain the necessary third-party licenses within the appropriate window of market demand. If our products are not in compliance with prevailing market trends and industry standards for a significant period of
time, we could miss crucial OEM and ODM design cycles, which could result in a material adverse effect on our business, financial condition and results of operations.

We Depend on Third-Party Manufacturers to Produce Our Products

Our products require wafers
manufactured with state-of-the-art fabrication equipment and techniques. We currently use one third-party foundry for wafer fabrication. We expect that, for the foreseeable future, all of our products will be manufactured at Taiwan Semiconductor
Manufacturing Corporation on a purchase-order-by-purchase-order basis. Since, in our experience, the lead time needed to establish a relationship with a new wafer fabrication partner is at least 12 months, and the estimated time for a foundry to
switch to a new product line ranges from four to nine months, we may have no readily available alternative source of supply for specific products. In addition to time constraints, switching foundries would require a diversion of engineering manpower
and financial resources to redesign our products so that the new foundry could manufacture them. We cannot assure you that we can redesign our products to be manufactured by a new foundry in a timely manner, nor can we assure you that we will not
infringe on the intellectual property of our current wafer manufacturer when we redesign our products for a new foundry. A manufacturing disruption experienced by our manufacturing partner, the failure of our manufacturing partner to dedicate
adequate resources to the production of our products, or the financial instability of our manufacturing partner would have a material adverse effect on our business, financial condition and results of operations. Furthermore, if the transition to
the next generation of manufacturing technologies by our manufacturing partner is unsuccessful, our business, financial condition and results of operations would be materially and adversely affected.

We have many other risks due to our dependence on a third-party manufacturer, including: reduced control over delivery schedules, quality, manufacturing
yields and cost; the potential lack of adequate capacity during periods of excess demand; limited warranties on wafers supplied to us; and potential misappropriation of our intellectual property. We are dependent on our manufacturing partner to
produce wafers with acceptable quality and manufacturing yields, to deliver those wafers on a timely basis to our third party assembly subcontractors and to allocate a portion of their manufacturing capacity sufficient to meet our needs. Although
our products are designed using the process design rules of the particular manufacturer, we cannot assure you that our manufacturing partner will be able to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely
basis or at an acceptable cost. Additionally, we cannot assure you that our manufacturing partner will continue to devote adequate resources to produce our products or continue to advance the process design technologies on which the manufacturing of
our products are based.

We Rely on Third-Party Subcontractors to Assemble and Test Our Products

Our products are assembled and tested by third-party subcontractors. We expect that, for the foreseeable future, the vast majority of our products will be
packaged and assembled at Amkor Technology on a purchase-order-by-purchase-order basis. We do not have long-term agreements with any of these subcontractors. Such assembly and testing is conducted on a purchase order basis. Because we rely on
third-party subcontractors to assemble and test our products, we cannot directly control product delivery schedules, which could lead to product shortages or quality assurance problems that could increase the costs of manufacturing or assembly of
our products. Due to the amount of time normally required to qualify assembly and test subcontractors, product shipments could be delayed significantly if we were required to find alternative subcontractors. Any problems associated with the
delivery, quality or cost of the assembly and test of our products could have a material adverse effect on our business, financial condition and results of operations.

Our Manufacturing Yields May Fluctuate

Fabricating semiconductors is an extremely complex process,
which typically includes hundreds of process steps. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer, variation in equipment used and numerous other factors can cause a substantial
percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor companies often experience
problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer. We typically purchase wafers, not die, and pay an agreed upon price for
wafers meeting certain acceptance criteria. Accordingly, we bear the risk of the yield of good die from wafers purchased meeting the acceptance criteria.



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Semiconductor manufacturing yields are a function of both product design, which is developed largely by
us, and process technology, which is typically proprietary to the manufacturer. Historically, we have experienced lower yields on new products. Since low yields may result from either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the
production process, and resolution of yield problems would require cooperation and communication between the manufacturer and us. This risk is compounded by the offshore location of our manufacturers, increasing the effort and time required to
identify, communicate and resolve manufacturing yield problems. As our relationships with new manufacturing partners develop, yields could be adversely affected due to difficulties associated with adapting our technology and product design to the
proprietary process technology and design rules of each manufacturer. Any significant decrease in manufacturing yields could result in an increase in our per unit product cost and could force us to allocate our available product supply among our
customers, potentially adversely impacting customer relationships as well as revenues and gross margins. We cannot assure you that our manufacturers will achieve or maintain acceptable manufacturing yields in the future.

Uncertainty and Litigation Risk Associated with Patents and Protection of Proprietary Rights

We rely in part on patents to protect our intellectual property. As of October 26, 2008, we had been issued and held 15 patents. These issued patents
are scheduled to expire between 2014 and 2025. In February 2008 we sold 18 patents and one patent application to Faust Communications, LLC for net proceeds of $9.5 million. In June 2006, we sold 4 patents to Samsung Electronics Co. Ltd. for net
proceeds of $1.0 million. In April 2005, we sold 58 patents to Faust Communications, LLC for net proceeds of $3.5 million. The patents sold related to products we no longer sell and not to products that we currently sell or plan to sell. We retained
a worldwide, non-exclusive license under the patents sold. The sales did not include our important patents covering the unique array processing technology used in our newer MiMagic and NeoMobileTV products. Additionally, we have several patent
applications pending. We cannot assure you that our pending patent applications, or any future applications, will be approved. Further, we cannot assure you that any issued patents will provide us with significant intellectual property protection,
competitive advantages, or will not be challenged by third parties, or that the patents of others will not have an adverse effect on our ability to do business. In addition, we cannot assure you that others will not independently develop similar
products, duplicate our products or design around any patents that may be issued to us.

We also rely on a combination of mask work
protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect our intellectual property. Despite these efforts, we cannot assure you that others will not independently
develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. Our
failure to meaningfully protect our intellectual property could have a material adverse effect on our business, financial condition and results of operations.

As a general matter, the semiconductor industry has experienced substantial litigation regarding patent and other intellectual property rights. In December 1998, the Company filed a lawsuit in the United States
District Court for the District of Delaware seeking damages and an injunction against Trident Microsystems, Inc. The suit alleged that Tridents embedded DRAM graphics accelerators infringed certain patents held by the Company. In January 1999,
Trident filed a counter claim against the Company alleging an attempted monopolization in violation of antitrust laws, arising from NeoMagics filing of the patent infringement action against Trident. In September 2005, the Court ruled that
there was no infringement by Trident.

Any patent litigation, whether or not determined in our favor or settled by us, would at a minimum
be costly and could divert the efforts and attention of our management and technical personnel from productive tasks, which could have a material adverse effect on our business, financial condition and results of operations. We cannot assure you
that current or future infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true,
will not materially adversely affect our business, financial condition and results of operations. If any adverse ruling in any such matter occurs, we could be required to pay substantial damages, which could include treble damages, to cease the
manufacturing, use and sale of infringing products, to discontinue the use of certain processes, or to obtain a license under the intellectual property rights of the third party claiming infringement. We cannot assure you, however, that a license
would be available on reasonable terms or at all. Any limitations in our ability to market our products, or delays and costs associated with redesigning our products or payments of license fees to third parties, or any failure by us to develop or
license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition and results of operations.

We Depend on Foreign Sales and Suppliers

Export sales have been a critical part of our business.
Sales to customers located outside the United States (including sales to the foreign operations of customers with headquarters in the United States and foreign manufacturers that sell to United States-based OEMs) accounted for 96%, 77% and 60% of
our product revenue for fiscal 2008, 2007 and 2006, respectively, and 99% and 95% of our product revenue for the nine months ended October 26, 2008 and October 29, 2007, respectively. We expect that product revenue derived from foreign
sales will continue to represent a significant portion of our total product revenue. Letters of credit issued by customers have supported a portion of our foreign sales. To date, our foreign sales have been denominated in United States dollars.
Increases in the value of the U.S. dollar relative to the local currency of our customers could make our products relatively more expensive than competitors products sold in the customers local currency.

Foreign manufacturers have produced, and are expected to continue to produce for the foreseeable future, all of our wafers. In addition, many of the
assembly and test services we use are procured from foreign sources. Wafers are priced in U.S. dollars under our purchase orders with our manufacturing suppliers.

Foreign sales and manufacturing operations are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles, potentially adverse tax consequences and export license requirements. In addition, we are subject to the risks inherent in conducting business internationally including foreign government
regulation, political and economic instability, and unexpected changes in diplomatic and trade relationships. Moreover, the laws of certain foreign countries in which our products may be developed, manufactured or sold, may not protect our
intellectual property rights to the same extent as do the laws of the United States, thus increasing the possibility of piracy of our products and intellectual property. We cannot assure you that one or more of these risks will not have a material
adverse effect on our business, financial condition and results of operations.

Our Financial Results Could Be Affected by Changes in Accounting
Principles

Generally accepted accounting principles in the United States are subject to issuance and interpretation by the Financial
Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have
a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, in December 2004, FASB issued SFAS 123(R), Share-Based Payment, which
replaces SFAS 123 and supersedes APB 25. As required, we adopted SFAS 123(R) in our first quarter of fiscal 2007. SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in the financial statements.
The pro forma disclosure previously permitted under SFAS 123 is no longer an acceptable alternative to recognition of expense in the financial statements. The adoption of SFAS 123(R) increased the amount of loss that we reported for fiscal 2008 and
fiscal 2007.

Our Stock Price May Be Volatile

The market price of our Common Stock, like that of other semiconductor companies, has been and is likely to continue to be, highly volatile. For example, during fiscal 2009, the highest closing sales price per share was $1.68 and the lowest
was less than $0.01. During fiscal 2008, the highest closing sales price was $4.52



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and the lowest was $1.68 per share. During fiscal 2007, the highest closing sales price was $7.95 per share and the lowest was $2.46 per share. During fiscal
2006, the highest closing sales price was $10.23 per share and the lowest was $1.80 per share. The market has from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular
companies. The market price of our Common Stock could be subject to significant fluctuations in response to various factors, including sales of our common stock, quarter-to-quarter variations in our anticipated or actual operating results,
announcements of new products, technological innovations or setbacks by us or our competitors, general conditions in the semiconductor industry, unanticipated shifts in the markets for mobile phones and other handheld devices or changes in industry
standards, losses of key customers, litigation commencement or developments, the impact of our financing activities, including dilution to shareholders, changes in or the failure by us to meet estimates of our performance by securities analysts,
market conditions for high technology stocks in general, and other events or factors. In future quarters, our operating results may be below the expectations of public market analysts or investors.



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------

The following Exhibits are filed as part
of, or incorporated by reference into, this Report:



|          |  |                                                                                                                                                                
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number    |  | Description                                                                                                                                                    
|3.1(8)    |  | Amended and Restated Certificate of Incorporation.                                                                                                             
|          | 
|3.2(14)   |  | Bylaws, as amended through April 6, 2007.                                                                                                                      
|          | 
|4.1(4)    |  | Preferred Stock Rights Agreement dated December 19, 2002, between the Company and EquiServe Trust Company, N.A.                                                
|          | 
|4.2(6)    |  | Amendment to Rights Agreement, dated as of August 20, 2004, between the Company and EquiServe Trust Company, N.A.                                              
|          | 
|4.3(15)   |  | Amendment No. 3 to Rights Agreement, dated as of April 6, 2007, between the Company and EquiServe Trust Company, N.A.                                          
|          | 
|4.4(5)    |  | Series A Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.                                                                        
|          | 
|4.5(5)    |  | Series B Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.                                                                        
|          | 
|4.6(5)    |  | Registration Rights Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.                                
|          | 
|4.7(3)    |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.                                                    
|          | 
|4.8(5)    |  | Amended and Restated Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock dated August 20, 2004.                    
|          | 
|4.9(9)    |  | Registration Rights Agreement dated December 13, 2005 by and between the Company and named Private Investors.                                                  
|          | 
|4.10(9)   |  | Warrant to Registration Rights Agreement dated December 13, 2005.                                                                                              
|          | 
|4.11(13)  |  | Form of Warrant originally issued December 6, 2006.                                                                                                            
|          | 
|4.12(16)  |  | Form of Amendment to Warrant, dated July 27, 2007.                                                                                                             
|          | 
|10.1(1)   |  | Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers.                                               
|          | 
|10.2(2)   |  | Lease Agreement, dated as of October 9, 1997, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.  
|          | 
|10.3(1)   |  | Amended and Restated 1993 Stock Plan and related agreements.                                                                                                   
|          | 
|10.4(1)   |  | Lease Agreement, dated as of February 5, 1996, between the Company and A&P Family Investments, as landlord.                                                    
|          | 
|10.5(1)   |  | 1997 Employee Stock Purchase Plan, with exhibit.                                                                                                               
|          | 
|10.6(10)  |  | 1998 Nonstatutory Stock Option Plan amended December 22, 2005.                                                                                                 
|          | 
|10.7(19)  |  | 2003 Stock Option Plan, as amended July 12, 2007.                                                                                                              
|          | 
|10.8(3)   |  | Amendment No. 1, dated as of February 26, 2002, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.
|          | 
|10.9(6)   |  | Securities Purchase Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.                                
|          | 
|10.10(6)  |  | Amended and Restated Patent Licensing Agreement dated March 28, 2005 by and between the Company and The Consortium for Technology Licensing, Ltd.              
|          | 
|10.11(6)  |  | Patent Purchase Agreement dated April 6, 2005 by and between the Company and Faust Communications, LLC.                                                        
|          | 
|10.12(7)  |  | Settlement Agreement and Release dated May 31, 2005 between the Company and Prakash Agarwal.                                                                   
|          | 
|10.13(8)  |  | Patent License Agreement dated September 1, 2005 between the Company and Sony Corporation.                                                                     
|          | 
|10.14(9)  |  | Securities Purchase Agreement dated December 13, 2005 by and between the Company and named Private Investors.                                                  
|          | 
|10.15(10) |  | Form of Retention Bonus Agreement, dated as of January 13, 2006.                                                                                               
|          | 
|10.16(11) |  | Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Douglas R. Young.                                                                      
|          | 
|10.17(11) |  | Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Scott Sullinger.                                                                       
|          | 
|10.18(19) |  | 2006 Employee Stock Purchase Plan, as amended July 12, 2007.                                                                                                   
|          | 
|10.19(12) |  | Form of Bonus Agreement.                                                                                                                                       
|          | 
|10.20(12) |  | Patent Sale Agreement dated June 22, 2006 by and between NeoMagic Corporation and Samsung Electronics Co. Ltd.                                                 
|          | 
|10.21(13) |  | Form of Subscription Agreement, dated as of November 30, 2006, between the Company and the investor signatories thereto.                                       
|          | 
|10.22(19) |  | Employment Agreement dated June 7, 2007 between NeoMagic Corporation and Steven P. Berry.                                                                      
|          | 
|10.23(17) |  | Description of oral consulting agreement with Steven P. Berry.                                                                                                 
|          | 
|10.24(18) |  | Description of oral bonus agreement.                                                                                                                           
|          | 
|10.25(20) |  | Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Syed Zaidi.                                                                       
|          | 
|10.26(20) |  | Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Deepraj Puar.                                                                     
|          | 
|10.27(20) |  | Patent Purchase Agreement with an effective date of January 17, 2008 by and between the Company, NeoMagic Israel Ltd. and Faust Communications Holdings, LLC.  
|          | 
|10.28(21) |  | Employment Agreement dated June 11, 2008 between NeoMagic Corporation and Pierre-Yves Couteau                                                                  
|          | 
|10.29(21) |  | Sublease Agreement dated July 21, 2008 between NeoMagic Corporation and Sea Micro, Inc.                                                                        



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|       |  |                                                                                                                                                                               
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                   
|31.1   |  | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|31.2   |  | Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|       | 
|32.1   |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        
|       | 
|32.2   |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        



|(1) | Incorporated by reference to an exhibit to the Companys registration statement on Form S-1, registration no. 333-20031.
|--- | ------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the period ended October 26, 1997.
|--- | ---------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to an exhibit to the Companys Form 8-A filed December 23, 2002.
|--- | ------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to an exhibit to the Companys Form 8-K filed December 23, 2002.
|--- | ------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to an exhibit to the Companys Form 8-K filed August 20, 2004.
|--- | ----------------------------------------------------------------------------------------



|(6) | Incorporated by reference to an exhibit to the Companys Form 8-A/A filed August 23, 2004.
|--- | ------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 31, 2005.
|--- | -------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended October 30, 2005.
|--- | ----------------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to an exhibit to the Companys Form 8-K filed December 16, 2005.
|--- | ------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to an exhibit to the Companys Form 8-K filed January 19, 2006.
|---- | -----------------------------------------------------------------------------------------



|(11) | Incorporated by reference to an exhibit to the Companys Form 8-K filed May 4, 2006.
|---- | ------------------------------------------------------------------------------------



|(12) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 30, 2006.
|---- | -------------------------------------------------------------------------------------------------------



|(13) | Incorporated by reference to an exhibit to the Companys Form 8-K filed December 1, 2006.
|---- | -----------------------------------------------------------------------------------------



|(14) | Incorporated by reference to an exhibit to the Companys Form 8-K filed April 12, 2007.
|---- | ---------------------------------------------------------------------------------------



|(15) | Incorporated by reference to an exhibit to the Companys Form 8-A/A filed April 12, 2007.
|---- | -----------------------------------------------------------------------------------------



|(16) | Incorporated by reference to an exhibit to the Companys Schedule TO-I filed June 28, 2007.
|---- | -------------------------------------------------------------------------------------------



|(17) | Incorporated by reference to the Companys Form 8-K filed June 13, 2007.
|---- | ------------------------------------------------------------------------



|(18) | Incorporated by reference to the Companys Form 8-K filed June 15, 2007.
|---- | ------------------------------------------------------------------------



|(19) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 29, 2007.
|---- | -------------------------------------------------------------------------------------------------------



|(20) | Incorporated by reference to the Companys Form 10-K for the year ended January 27, 2008
|---- | ----------------------------------------------------------------------------------------



|(21) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 27, 2008.
|---- | -------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                                                             
|-------------------------------------------------------------
|NEOMAGIC CORPORATION                                         
|(Registrant)                                                 
|                                                             
|/s/ Douglas R. Young                                         
|Douglas R. Young                                             
|President, Finance and Chief Financial Officer (Acting)      
|(Authorized Officer and (Acting) Principal Financial Officer)

March 19, 2009



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##### Table of Contents

INDEX TO EXHIBITS



|          |  |                                                                                                                                                                
|--------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number    |  | Description                                                                                                                                                    
|3.1(8)    |  | Amended and Restated Certificate of Incorporation.                                                                                                             
|          | 
|3.2(14)   |  | Bylaws, as amended through April 6, 2007.                                                                                                                      
|          | 
|4.1(4)    |  | Preferred Stock Rights Agreement dated December 19, 2002, between the Company and EquiServe Trust Company, N.A.                                                
|          | 
|4.2(6)    |  | Amendment to Rights Agreement, dated as of August 20, 2004, between the Company and EquiServe Trust Company, N.A.                                              
|          | 
|4.3(15)   |  | Amendment No. 3 to Rights Agreement, dated as of April 6, 2007, between the Company and EquiServe Trust Company, N.A.                                          
|          | 
|4.4(5)    |  | Series A Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.                                                                        
|          | 
|4.5(5)    |  | Series B Warrant to Satellite Strategic Finance Associates, LLC, dated August 20, 2004.                                                                        
|          | 
|4.6(5)    |  | Registration Rights Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.                                
|          | 
|4.7(3)    |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock.                                                    
|          | 
|4.8(5)    |  | Amended and Restated Certificate of Designations, Preferences and Rights of the Series B Convertible Preferred Stock dated August 20, 2004.                    
|          | 
|4.9(9)    |  | Registration Rights Agreement dated December 13, 2005 by and between the Company and named Private Investors.                                                  
|          | 
|4.10(9)   |  | Warrant to Registration Rights Agreement dated December 13, 2005.                                                                                              
|          | 
|4.11(13)  |  | Form of Warrant originally issued December 6, 2006.                                                                                                            
|          | 
|4.12(16)  |  | Form of Amendment to Warrant, dated July 27, 2007.                                                                                                             
|          | 
|10.1(1)   |  | Form of Indemnification Agreement entered into by the Company with each of its directors and executive officers.                                               
|          | 
|10.2(2)   |  | Lease Agreement, dated as of October 9, 1997, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.  
|          | 
|10.3(1)   |  | Amended and Restated 1993 Stock Plan and related agreements.                                                                                                   
|          | 
|10.4(1)   |  | Lease Agreement, dated as of February 5, 1996, between the Company and A&P Family Investments, as landlord.                                                    
|          | 
|10.5(1)   |  | 1997 Employee Stock Purchase Plan, with exhibit.                                                                                                               
|          | 
|10.6(10)  |  | 1998 Nonstatutory Stock Option Plan amended December 22, 2005.                                                                                                 
|          | 
|10.7(19)  |  | 2003 Stock Option Plan, as amended July 12, 2007.                                                                                                              
|          | 
|10.8(3)   |  | Amendment No. 1, dated as of February 26, 2002, between the Company and A&P Family Investments, as landlord for the leased premises located at 3250 Jay Street.
|          | 
|10.9(6)   |  | Securities Purchase Agreement dated August 19, 2004 by and between the Company and Satellite Strategic Finance Associates, LLC.                                
|          | 
|10.10(6)  |  | Amended and Restated Patent Licensing Agreement dated March 28, 2005 by and between the Company and The Consortium for Technology Licensing, Ltd.              
|          | 
|10.11(6)  |  | Patent Purchase Agreement dated April 6, 2005 by and between the Company and Faust Communications, LLC.                                                        
|          | 
|10.12(7)  |  | Settlement Agreement and Release dated May 31, 2005 between the Company and Prakash Agarwal.                                                                   
|          | 
|10.13(8)  |  | Patent License Agreement dated September 1, 2005 between the Company and Sony Corporation.                                                                     
|          | 
|10.14(9)  |  | Securities Purchase Agreement dated December 13, 2005 by and between the Company and named Private Investors.                                                  
|          | 
|10.15(10) |  | Form of Retention Bonus Agreement, dated as of January 13, 2006.                                                                                               
|          | 
|10.16(11) |  | Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Douglas R. Young.                                                                      
|          | 
|10.17(11) |  | Employment Agreement dated May 1, 2006 between NeoMagic Corporation and Scott Sullinger.                                                                       
|          | 
|10.18(19) |  | 2006 Employee Stock Purchase Plan, as amended July 12, 2007.                                                                                                   
|          | 
|10.19(12) |  | Form of Bonus Agreement.                                                                                                                                       
|          | 
|10.20(12) |  | Patent Sale Agreement dated June 22, 2006 by and between NeoMagic Corporation and Samsung Electronics Co. Ltd.                                                 
|          | 
|10.21(13) |  | Form of Subscription Agreement, dated as of November 30, 2006, between the Company and the investor signatories thereto.                                       
|          | 
|10.22(19) |  | Employment Agreement dated June 7, 2007 between NeoMagic Corporation and Steven P. Berry.                                                                      
|          | 
|10.23(17) |  | Description of oral consulting agreement with Steven P. Berry.                                                                                                 
|          | 
|10.24(18) |  | Description of oral bonus agreement.                                                                                                                           
|          | 
|10.25(20) |  | Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Syed Zaidi.                                                                       
|          | 
|10.26(20) |  | Employment Agreement dated December 5, 2007 between NeoMagic Corporation and Deepraj Puar.                                                                     



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##### Table of Contents

|          |  |                                                                                                                                                                               
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number    |  | Description                                                                                                                                                                   
|10.27(20) |  | Patent Purchase Agreement with an effective date of January 17, 2008 by and between the Company, NeoMagic Israel Ltd. and Faust Communications Holdings, LLC.                 
|          | 
|10.28(21) |  | Employment Agreement dated June 11, 2008 between NeoMagic Corporation and Pierre-Yves Couteau                                                                                 
|          | 
|10.29(21) |  | Sublease Agreement dated July 21, 2008 between NeoMagic Corporation and Sea Micro, Inc.                                                                                       
|          | 
|31.1      |  | Certification of the Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|          | 
|31.2      |  | Certification of the Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|          | 
|32.1      |  | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        
|          | 
|32.2      |  | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                        



|(1) | Incorporated by reference to an exhibit to the Companys registration statement on Form S-1, registration no. 333-20031.
|--- | ------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the period ended October 26, 1997.
|--- | ---------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to an exhibit to the Companys Form 8-A filed December 23, 2002.
|--- | ------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to an exhibit to the Companys Form 8-K filed December 23, 2002.
|--- | ------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to an exhibit to the Companys Form 8-K filed August 20, 2004.
|--- | ----------------------------------------------------------------------------------------



|(6) | Incorporated by reference to an exhibit to the Companys Form 8-A/A filed August 23, 2004.
|--- | ------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 31, 2005.
|--- | -------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended October 30, 2005.
|--- | ----------------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to an exhibit to the Companys Form 8-K filed December 16, 2005.
|--- | ------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to an exhibit to the Companys Form 8-K filed January 19, 2006.
|---- | -----------------------------------------------------------------------------------------



|(11) | Incorporated by reference to an exhibit to the Companys Form 8-K filed May 4, 2006.
|---- | ------------------------------------------------------------------------------------



|(12) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 30, 2006.
|---- | -------------------------------------------------------------------------------------------------------



|(13) | Incorporated by reference to an exhibit to the Companys Form 8-K filed December 1, 2006.
|---- | -----------------------------------------------------------------------------------------



|(14) | Incorporated by reference to an exhibit to the Companys Form 8-K filed April 12, 2007.
|---- | ---------------------------------------------------------------------------------------



|(15) | Incorporated by reference to an exhibit to the Companys Form 8-A/A filed April 12, 2007.
|---- | -----------------------------------------------------------------------------------------



|(16) | Incorporated by reference to an exhibit to the Companys Schedule TO-I filed June 28, 2007.
|---- | -------------------------------------------------------------------------------------------



|(17) | Incorporated by reference to the Companys Form 8-K filed June 13, 2007.
|---- | ------------------------------------------------------------------------



|(18) | Incorporated by reference to the Companys Form 8-K filed June 15, 2007.
|---- | ------------------------------------------------------------------------



|(19) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 29, 2007.
|---- | -------------------------------------------------------------------------------------------------------



|(20) | Incorporated by reference to the Companys Form 10-K for the year ended January 27, 2008.
|---- | -----------------------------------------------------------------------------------------



|(21) | Incorporated by reference to an exhibit to the Companys Form 10-Q for the quarter ended July 27, 2008.
|---- | -------------------------------------------------------------------------------------------------------



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